Lawmakers and financial regulators have put adjustable-rate mortgages and payday loans under a spotlight, while auto title loans have been largely overlooked. Consumers in 21 states depend on the loans when they do not have conventional options, according to consumer advocacy groups, which criticize title loans for their triple-digit interest rates and balloon payments that are due within a month as well as for their threat to repossess borrowers' cars.
"We consider these loans to be a triple threat for borrowers," says Center for Responsible Lending (CRL) spokeswoman Ginna Green. Most borrowers who put a personal vehicle up as collateral for a loan are gambling their last asset. A person receiving a $1,000 loan also may pay more than twice that in interest, for a loan far less than the car's actual value. Most traditional lenders consider the borrower's income, credit, and debt to ensure the person can afford the payments; but title lenders do not take these precautions. "They get a lot of folks trapped in debt, and to the point where they've got their family vehicle on the hook," Green says. Auto title loan agreements also may contain hidden fees and repossession stipulations; some lenders even install a GPS tracking device in the car to locate it for repossession if a payment is late.
A report issued in February by CRL and the Consumer Federation of America found that about 1.7 million car title loans originate every year, with the average customer paying $2,142 in interest on a $951 loan that they roll over about eight times. An estimated 7,730 car title lenders in 21 states charge borrowers $3.6 billion in interest each year. Green says that many borrowers have options if they are shut out of the conventional loan market. Possible personal lending sources include employers, family or friends, or religious institutions and community groups. Some credit unions offer small-dollar loan products at more reasonable interest rates than auto-title lenders.