WASHINGTON—A new study reveals that auto title loans are plagued by the same issues found in the payday loan market—unnecessarily high prices and unaffordable payments that lead to extended indebtedness.
The study from The Pew Charitable Trusts examined a product used by more than two-million Americans annually in which they borrow against the value of their cars, with the title used as collateral.
The telephone and focus group study found that in addition to encountering many of the same issues that plague payday loan users, title loan borrowers face the additional risk of losing an asset that for many is their primary form of transportation.
“On average, the larger loan sizes in the title loan market also lead borrowers to spend more than double the amount that payday loan borrowers do annually,” Pew stated.
Pew has issued policy recommendations that address these issues, expecting that by implementing these recommendations, the Consumer Financial Protection Bureau and state policymakers can alleviate the harms identified in the research.
Key findings:
- Auto title loan customers spend about $1,200 in fees each per year for loans that average $1,000. Title loan customers pay a total of about $3 billion in fees annually. The typical annual percentage rate for an auto title loan is 300%.
- On average, lump-sum title loan payments consume 50% of a typical borrower’s gross monthly income. “That’s far more than most borrowers can afford. By contrast, a typical payday loan payment takes 36 percent of a typical borrower’s paycheck,” Pew said.
- Between 6% and 11% of title loan borrowers have a car repossessed annually. One-third of all title loan borrowers do not have another working vehicle in their households, Pew said.
- Only one-quarter of title loan borrowers use the loans for an unexpected expense. Half of borrowers report using title loans to pay regular bills. More than nine in 10 title loans are taken out for personal reasons, compared with just 3% for a business owned by the borrower.
- Title loan borrowers believe the industry should be more regulated. “Borrowers overwhelmingly favor regulation mandating that they be allowed to repay the loans in affordable installments,” said Pew.