When you’re desperate for cash and run out of options, you might be willing to risk your car to save time.
This is what happens with an auto title loan. You keep your car, but assign title to the lender who uses the vehicle as collateral. If you don’t pay on time, the lender can repossess your wheels.
But the auto title loan market is “beset with problems,” including unaffordable payments and excessive pricing, according to a new report from the Pew Charitable Trusts.
“We found that auto title loans share the same detrimental characteristics as payday loans,” said Nick Bourke, director of Pew’s Small Amount Lending Project. “They demand lump sum payments that borrowers can’t afford and most customers end up having to re-borrow the loans repeatedly.”
Fewer people use title loans than take out payday loans, but they are usually for larger amounts. And they generally incur higher costs than payday loans, according to the Pew study. Plus, there’s the added risk of losing a major asset – your car – if the debt can’t be repaid.
One of the most important findings of this report: the average customer pays more in fees than the amount borrowed.
The average auto title loan is $1,000 and the monthly fee is $250 (equivalent to 300% APR). This $1,250 payment is usually due in 30 days and is more than most borrowers can handle. Pew estimates that this is about 50% of most borrowers’ monthly income, so they renew the loan – over and over again. Add up all these fees and the average customer pays $1,200 to borrow a thousand dollars.
Auto title loans are advertised as a way to handle a temporary cash flow problem or an emergency, but few people use them that way. Half of those surveyed by Pew researchers said they took out the loan to pay their regular bills.
Companies that offer title loans pride themselves on meeting a need for those not served by the banking system and other lending companies.
NBC News has repeatedly attempted to contact the American Association of Responsible Auto Lenders for comment, but has received no response. We were also unable to reach anyone at TMX Finance, one of the key players in this market, which operates more than 1,350 TitleMax stores in 17 states.
On its website, TitleMax says it was built on the idea “to provide an alternative to customers who, for whatever reason, couldn’t qualify for traditional loans or didn’t have time to wait weeks of deliberation from approval”. The company says its goal is to “give you as much money as possible while keeping your payments manageable.”
A business model based on risky loans
Auto title loans are currently legal in 25 states.* Pew estimates that more than two million Americans use them each year, generating about $3 billion in revenue.
The Pew study also found that 6-11% of people who take out an auto title loan have their vehicle repossessed each year.
“They’re lending to people who can’t repay,” said James Speer, executive director of the Virginia Poverty Law Center. “These loans are really, really bad.”
Speer told NBC News he saw the damage that could result. Several clients of the legal center found themselves on the street because they could not afford to pay their rent and their mortgage, so they paid off the car loan. Others lost their jobs because their vehicles were repossessed and they couldn’t get to work.
“It’s really not a loan. It’s loan sharking,” Speer said.
This is how William Sherod sees it. He borrowed $1,000 from an auto title lender in Falls Church, Va., last year. Everything was fine until $26 was missing on a month’s payment. The lender repossessed his car and wouldn’t return it until he paid off the loan in full, plus the repo fee. Sherod had to borrow the $833 from his family.
“They were really nice when I took the loan, but when I fell behind I was treated like crap,” he told NBC News. “They come after you because they know you are desperate. It was a terrible experience. I would never do something like that again.
Should something be done?
Pew wants state and federal regulators, especially the Consumer Financial Protection Bureaueither ban these high-interest, low-value loans, or develop regulations to “mitigate the harms” identified by this new research.
The report suggests a number of ways to make these loans more transparent, affordable and secure:
- Ensure the borrower has the ability to repay the loan as structured
- Set maximum allowed charges
- Spread costs evenly over the life of the loan
- Require concise information
- Guarding Against Harmful Reimbursement and Collection Practices
*Alabama, Arizona, California, Delaware, Florida, Georgia, Idaho, Illinois, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Mexico, Ohio, Oregon, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia and Wisconsin.