A consumer watchdog report reveals that 1 in 5 borrowers taking out a single-payment auto title loan have their vehicle seized for failing to repay debt.
The Consumer Financial Protection Bureau (CFPB) found overall that people assigning their cars as collateral for a supposedly short-term emergency loan are suffering high repossession rates, protracted repayment periods, and interest rates soaring to 300 percent.
The report (PDF) is deemed the first from federal regulators to delve on the auto title lending sector, which has significantly grown in years, but stays prohibited in half of the United States. In the similar case of payday loans, the findings could result in additional regulatory measures in the industry.
The group discovered that the usual auto title loan was about $700, accompanied by a 300 percent annual percentage rate — far higher than most credit forms.
CFPB Director Richard Cordray warned that instead of issuing single payment for their loan, most borrowers end up knee-deep in debt.
“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.”
Results showed that one out of five auto title loans led to the borrower’s car repossession, worse than the Pew Charitable Trusts-compiled data showing up to 11 percent of total auto title loans being repossessed.
In addition, four out of five auto title loans were not paid back in a single payment (leading to more loans to pay initial debt), while more than 50 percent of loans become repeat-borrowing acts, turning to long-term debt burden.
The data emerged from almost 3.5 million auto title loan records from non-bank lenders between 2010 and 2013.
Auto title loans are no different from payday loans, a system where customers borrow money for short periods, typically a month. The latter, however, needs a car as collateral, with the loan usually granted to individuals with unattractive credit, but have car ownership to their name.
These loans were obtained by about 2 million Americans based on a 2015 research. They grew in popularity after many states ruled a cap on the interest rate on payday loans; many payday lenders repositioned themselves as auto title lenders to continue their high-cost lending business.
Twenty U.S. states allow for auto title loans to be repaid in full once due. Five states, on the other hand, allow pay-over-time loan structures.
CFPB officials stated that they are considering new regulations on the industry as part of the forthcoming rules for payday lending.
Photo: J. Triepke | Flickr