Debt Detour: The Automobile Title Lending
Published: September 1, 2007
This report identifies key information on the title loan industry to inform the public debate on how to best apply nationally recognized small loan consumer protections to the Illinois title loan industry. Publicly available data on the number of title loans and borrower demographics is not readily available. However, court records of cases involving automobile title loan borrowers who have defaulted on their loans and are being pursued through the court system provide vital statistics on the impact of such loans. The report describes information on the loan terms and conditions, default conditions, automobile characteristics, and borrower demographics of auto title loans, based on court cases filed against borrowers in default in Cook County (the county in which Chicago is located) during 2005.
This report, for the first time, provides a method for estimating the loan terms and conditions, default conditions, automobile characteristics, and borrower demographics of title loans in Illinois based on Cook County court cases filed against borrowers in default during 2005. It identifies key information on the title loan industry necessary to inform the public debate on how to best apply nationally recognized small loan consumer protections to the Illinois title loan industry. Publicly available data on the number of title loans and borrower demographics is not readily available. However, court records of cases involving automobile title loan borrowers who have defaulted on their loans and are being pursued through the court system provide several key statistics.
• In 2005, the last year specific data on title lending licensees was provided by the state regulator, there were 63 title loan companies operating 260 stores throughout Illinois. Based on this information, title lenders operate in nearly every metropolitan region and in nearly every legislative district in Illinois.
• The median loan principal is $1,500, the median finance charge is $1,536, and the average annual percentage rate is 256 percent.
• Nearly all of the loans referenced in the court cases had terms of more than 60 days, allowing them to circumvent strong consumer protections passed in 2001. Two loans with terms of less than 60 days had loan principals greater than $2,000 in potential violation of state rules.
• Of the loans reviewed, 93 percent were structured so that the borrower made monthly, interest only payments and a final balloon payment of the entire loan principal. These types of loans may contribute to a series of refinances or renewals commonly described by consumer advocates as a “cycle of debt.” In fact, 21 percent of the loans reviewed were used to repay a previous loan with the same lender.
• Eighteen percent of the automobile title loans in default resulted in the repossession or loss of the borrower’s automobile. The repossession of a household vehicle results in the loss of a significant asset, decreased mobility, and the potential to reduce the ability of a borrower to get to work.
• Title loans are made against older, high mileage vehicles. The average age of a vehicle pledged as collateral for a title loan is 11.4 years, and he odometer reading at the time of the loan is 90,823 miles.
• The average borrower pursued in court by a title lender faced median damages of $5,462 on a median loan of just $1,500 - nearly four times the original loan principal. Included in this amount is $268 in court and attorney’s fees.
• Automobile title loans were also more likely to be made to male borrowers living in moderate to middle-income, predominately minority communities.
• Borrowers often fail to appear in court, resulting in a default judgment in favor of the lender. In the event that a defendant does not appear in court, a default judgment is granted and the lender wins the case by default. Default judgments were granted in 48 percent of the automobile title loan cases reviewed.