Car-title loans cost consumers$3.6 billion annually
Center for Responsible Lending
February 28, 2013
300 Percent Interest Makes Borrowers Pay Twice What They Receive in Credit
Durham, N.C.--Car-title loans cost borrowers $3.6 billion in interest each year, more than twice the $1.6 billion in credit borrowed, a new report from the Center for Responsible Lending (CRL) and Consumer Federation of America (CFA) shows. For the full report, go to http://rspnsb.li/13ZMZ8V. “Driven to Disaster: Car-Title Lending and Its Impact on Consumers,” provides the first national estimate of the size of the car-title loan market and details its potentially devastating impact on consumers.
Car-title loans are high-cost loans most often structured as a small, 30-day debt secured by the title to a vehicle owned outright by a borrower. These loans share many of payday loans’ predatory features: A triple-digit interest rate, a balloon payment at the end of the loan’s term, and—critically—a failure by the lender to evaluate a borrower’s ability to repay. Car-title loans also produce the same effect that payday loans do: A debt trap that leaves too many borrowers worse off than when they started. The new report found, for example, that one in six car-title borrowers studied faced repossession, endangering what often is often a family’s most important asset: their car. Repossession fees compound the damage, piling additional costs on the borrower that typically equal half of the outstanding loan balance.
The report also found that:
- Approximately 7,730 car title lenders operate in 21 states and make 1.7 million loans annually.
- The average car-title borrower renews a loan eight times, paying $2,142 in interest for $951 of credit.
- A typical borrower receives cash equal to only 26 percent of a car’s value, yet pays 300% APR.
These findings underscore the need for strong consumer safeguards in car-title lending. CRL and CFA recommend that states with reasonable rate caps not grant exemptions to car-title lenders, and that states vigorously enforce them, as car-title lenders often take advantage of loopholes or gaps to avoid compliance. In addition, regulators should require car-title lenders to:
- Structure this type of credit as an installment loan, with reasonable limits on interest;
- Evaluate a borrower’s ability to repay before making a loan;
- Provide borrowers with protections in case of default, such as notifying them prior to sale or repossession.
For more information, contact Kathleen Day in DC at 202.349.1871 or firstname.lastname@example.org; Graciela Aponte in Calif. at 510.379.5518 or email@example.com; or Ginna Green at 510.379.5513 or firstname.lastname@example.org.
About the Center for Responsible Lending
The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.