WASHINGTON, D.C. — A report released today by the Consumer Financial Protection Bureau (CFPB) analyzed the dangers that auto title loans pose to consumers. By examining nearly 3.5 million anonymized, single-payment auto title loan records, the agency found that about 20% of borrowers who take out a single-payment auto title loan end up having their car or truck seized by the lender for failing to repay their debt.
More than 80% of single-payment auto title loan borrowers also wind up renewing their loan the day it’s due because of being unable to pay, according to the report. This, the report adds, has the consequence of more than 66% of borrowers having to take out seven or more consecutive loans until they’re able to fully repay.
“Our study delivers clear evidence of the dangers auto title loans pose for consumers,” said CFPB Director Richard Cordray. “Instead of repaying their loan with a single payment when it is due, most borrowers wind up mired in debt for most of the year. The collateral damage can be especially severe for borrowers who have their car or truck seized, costing them ready access to their job or the doctor’s office.”
The average amount for an auto title loan is $700, according to the CFPB. The typical annual percentage rate for a loan is about 300%. The report examined single-payment auto title loans, where a borrower is required to repay the loan in a lump sump that includes the loan amount, interest and fees. Twenty states in the U.S. allow for this form of loan, however, five states only allow for title loans that can be repayed in installments.
Borrowers generally use these title loans to cover an emergency or other cash-flow shortage between paychecks or other income, according to the CFPB. Borrowers use their vehicle for collateral and the lender holds their title in exchange for a loan amount. If the loan is repaid, the title is returned.
While examining auto title loans, the CFPB found that borrowers of title loans shared many of the same issues that borrowers of payday loans have. Along with high interest rates, both types of loans lead to high rates of consumer reborrowing, which can create long-term debt traps.
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