NEW YORK—Loans tied to auto titles have become the biggest boom in subprime lending since the mortgage crisis, and often feature backbreaking interest rates, according to a new analysis by the New York Times.
The bad news for many consumers—and potentially for the credit unions to which they belong—the market for auto-title loans continues to grow.
Auto title loans, with can have terms from one month to two years, require borrowers to turn over the title to their vehicles to get the funds, which are often based on a percentage of the car’s estimated resale value, according to the Times report.
More than 1.1 million U.S. households turned to auto title loans in 2013, according to an FDIC survey.
As The New York Times reported, what makes title loans even more damaging to borrowers than similar payday loans is that inability to pay means loss of the vehicle, which can then mean loss of a job and further debt problems that continue to spiral.
The New York Times said a review it conducted of more than three-dozen loan agreements found that after factoring in various fees, the effective interest rates ranged from nearly 80% to over 500%. “While some loans come with terms of 30 days, many borrowers, unable to pay the full loan and interest payments, say that they are forced to renew the loans at the end of each month, incurring a new round of fees,” the Times reported.
The Times noted that roughly one in every six title-loan borrowers will have the car repossessed, according to an analysis of 561 title loans by the Center for Responsible Lending, Durham, N.C.
The high interest rates on the loans have enticed an influx of Wall Street money, The New York Times reported, including private equity firms and some big banks.
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