More than 2 million people, approximately 1 percent of American adults, use high-interest automobile title loans annually, borrowing against their cars. 1 A lender, after inspecting a car brought in by a prospective borrower, makes a loan based on a portion of the vehicle’s value and keeps the title as collateral while the customer continues using the car. 2 The borrower usually must repay the principal plus a fee in a single balloon payment, typically after one month, and the lender has the right to repossess the car if the loan is not repaid. 3
Market practices and borrowers’ experiences
4 States have differing limits on loan sizes, fees, and durations, resulting in large cross-state variation in the loans’ costs for borrowers. 5 Title loans are less widely used than payday loans and are usually made for larger amounts, but the two products are similar in structure, cost, and business model. The typical customer for both is a low-income worker who is struggling to make ends meet. 6 These parallels are underscored by the fact that about half of title loan branches also offer payday loans. 7
Most title loans are structured as balloon-payment, also known as lump-sum payment, loans, as described above; some states also allow or require title loans to be repayable in installments. 8 When the loan comes due, borrowers who cannot afford to repay can renew it for a fee. As with payday loans, payments exceed most title loan borrowers’ ability to repay-so the large majority of loans in this market are renewals, rather than new extensions of credit. 9
One key reason title loans are so expensive is that, as in the payday loan market, borrowers do not primarily shop based on price, and so lenders do not lower prices to attract customers. 10 Instead, lenders tend to compete most on location, convenience payday loans Delphos, and customer service. In states that limit the fees lenders can charge for payday loans, lenders operate fewer stores-with each serving more customers-and credit remains widely available. 11 Similar access to title loans could be maintained at prices substantially lower than those in the market today. 12
The research base on title loans is far smaller than that on similar subprime small-dollar credit products, such as payday loans. 13 To begin filling this gap, The Pew Charitable Trusts conducted the first nationally representative telephone survey of borrowers, a series of focus groups, and an examination of state regulatory data and company filings to illuminate practices, experiences, and problems in the title loan market. (See Appendix C.) Unless otherwise noted, information about market trends and legal requirements is based on Pew’s analysis of lenders’ practices, market trends, and applicable laws. The analysis found that:
- Title loan customers spend approximately $3 billion annually, or about $1,200 each, in fees for loans that average $1,000. 14 The annual interest rates for title loans are typically 300 percent annual percentage rate (APR), but lenders charge less in states that require lower rates. 15
- The average lump-sum title loan payment consumes 50 percent of an average borrower’s gross monthly income, far more than most borrowers can afford. 16 By comparison, a typical payday loan payment takes 36 percent of the borrower’s paycheck. 17
- Between 6 and 11 percent of title loan customers have a car repossessed annually. One-third of all title loan borrowers do not have another working vehicle in their households.
- Only one-quarter of borrowers use title loans for an unexpected expense; half report using them to pay regular bills. More than 9 in 10 title loans are taken out for personal reasons; just 3 percent are for a business the borrower owns or operates.
- Title loan borrowers overwhelmingly favor regulation mandating that they be allowed to repay the loans in affordable installments.
This report details these findings, and shows that the title loan market has many similarities with the payday loan market as well as several important differences, such as larger loan sizes and the risk to borrowers of losing a vehicle. Overall, the research demonstrates that the title loan ental problems as the payday loan market, including unaffordable balloon payments, unrealistically short repayment periods, and unnecessarily high prices.
Pew urges state and federal policymakers to address these problems. They may elect to prohibit high-cost loans altogether (as some states have done), or issue new, more uniform regulations that would fundamentally reform the market for payday and title loans by:
- Ensuring that the borrower has the ability to repay the loan as structured.
- Spreading costs evenly over the life of the loan.
- Guarding against harmful repayment and collections practices.
- Requiring concise disclosures.
- Setting maximum allowable charges.
In particular, as the federal regulator for the auto title loan market, the Consumer Financial Protection Bureau should act urgently to alleviate the harms identified in this research. Although the bureau lacks the authority to regulate interest rates, it has the power to codify important structural reforms into federal law.