Are auto title loans predatory? A federal study raises concerns.

A report released Wednesday by the federal Consumer Financial Protection Bureau found high rates of vehicle repossession and long-lasting debt within the auto title lending industry.

Auto title loans are meant to provide borrowers with short-term access to cash when they need it most. But the CFPB found that for many consumers, loans quickly snowball into long-term debt. The report raises questions about the state of current lending practices and could spur additional federal regulation.

Title loans allow borrowers to use their vehicles as collateral to borrow what are usually small amounts of money – an average of $700. Lenders hold title to the borrower’s vehicle until the loan is paid off and charge a annual percentage rate of approximately 300 percent, according to the report. If a loan cannot be repaid in full, borrowers are forced to renew the loan and often pay associated fees.

Only 20 US states currently require auto title loans to be paid in full at the end of the initial term, while five others allow structured payment plans.

The bureau’s study of 3.5 million loans from 2010 to 2013 showed that one in five borrowers with a one-time payment car title loan ends up having their vehicle owned by lenders, and about half of these loans end up becoming long-term debt obligations with borrowers frequently. take out four or more loans to repay their original loans. Eighty percent of auto title loans are not repaid in full in one payment.

The CFPB also found that about two-thirds of the securities lending industry is backed by borrowers stuck in a debt cycle for seven months or more.

“Our study gives clear evidence of the dangers auto title lending poses to consumers,” CFPB Director Richard Cordray said in a statement. “Instead of repaying their loan in one installment when due, most borrowers find themselves in debt for most of the year.”

Mr Cordray added that borrowers may be more affected by repossession as it can block their access to work or other services.

Automatic title loans work the same way as short-term payday loans, which have also proven be problematic for borrowers; According to The Pew Charitable Trusts, online payday loans averaged an APR of 650% and led nine out of 10 borrowers to file complaints with the Better Business Bureau about their lenders. Last week, Google announced it would ban ads on its services for such loans.

The auto title lending industry rose to prominence after states began capping payday loan interest rate levels over the past decade. Lenders have continued this practice by moving their collateral from the money to the vehicles, and auto title lending currently attracts 2 million Americans in need of short-term loans each year. Pew also found that about 5 million Americans take out payday loans each year.

Associated Press material was used in this report.

One-time payment car title loans can cause long-term debt

Most borrowers who take out a one-time payment car title loan end up borrowing again because they can’t afford to make the payment when due, according to a new federal study.

That’s why a lot of auto title business comes from borrowers who end up taking out multiple loans in a row and staying in debt for months, according to the Consumer Financial Protection Bureau. found in a study released on Wednesday.

Car title loans are a type of short-term, high-interest loan used by consumers who lack money to pay bills or meet unexpected expenses. The title serves as collateral.

But what may be considered a short-term loan often turns into long-term debt as additional fees and interest are added to the original amount owed, according to the report. Most car title loans are due in 30 days, but in some states they can be due in as little as two weeks.

About one in five auto title borrowers have a car seized for non-payment from a lender, according to the report.

“Collateral damage can be especially severe for borrowers whose car or truck is seized, costing them easy access to their job or doctor’s office,” office manager Richard Cordray said during a briefing. call with reporters.

For its report, the bureau looked at about 3.5 million one-time payment loans issued by non-bank lenders from 2010 to 2013.

One-time payment car title loans, which are repaid with a lump sum payment, are available in 20 states; five other states only allow auto title loans that are repaid in installments, according to the report.

Car title loans are usually based on a percentage of the car’s value, as determined by the lender. The lender holds title to the borrower’s car, truck or motorcycle and returns it when the loan is repaid. The borrower retains use of the vehicle as long as the loan is outstanding, but the lender can repossess it if the borrower does not repay.

The typical car title loan is $700 and the effective annual rate is around 300%, according to the report.

The report found that only 12% of borrowers managed to be “one and done”, meaning they repaid their loans with fees and interest in one payment within 30 days.

Car title loans are similar to payday loans, although they are often for larger sums. They will likely be covered by new payday loan regulations the bureau is expected to come up with in the coming weeks.

A last year’s report from the Pew Charitable Trusts urged policymakers to enact reforms to make auto title loans less risky, such as adding a requirement that lenders assess a borrower’s ability to repay the loan, based on income and expenses .

The Pew Report found that more than two million people, or about 1% of American adults, use high-interest auto title loans each year.

Borrowers spend about $3 billion a year, or $1,200 each, in fees for loans that average $1,000, Pew found.

Here are some questions and answers about car title loans:

Are car title loans used primarily for emergencies?

According to Pew research, only a quarter of borrowers use title loans for unexpected expenses, while half say they use them to pay regular bills.

What alternatives are available to borrowers?

Delvin Davis, senior research analyst at the Center for Responsible Lending, said even a high-interest credit card might be a better option than a car title loan. “I would avoid them at all costs,” he said. “Once you’re in, it’s hard to get out.”

the The Federal Trade Commission urges consumers to consider tapping into any savings accounts they might have, or even borrowing from family or friends.

Some credit unions offer “borrow and save” programs, which allow borrowers to take out small loans if they agree to set aside some money in a savings account, to help provide liquidity for future needs.

Where can I complain about a car title lender?

If you have a complaint, you can contact your state attorney general’s office. You can also file a complaint with the Consumer Financial Protection Bureau.

Here’s the real reason why payday loans are such a huge problem

A new study from the Consumer Financial Protection Bureau shows how easy it is for cash-strapped borrowers to get drawn into a vehicle title loan debt trap.

Auto title loans share many of the same nefarious qualities that have made their cousin, the payday loan, such a hot target for regulators. Both products are powered by three-digit interest rates (except in states where they are prohibited or have specific interest rate caps) and are issued without regard to the borrower’s ability to repay the ready. While payday lenders use a borrower’s proof of income (like a pay stub) to secure their loan, auto title lenders use a borrower’s car as collateral.

Since the value of the title loan is based on the value of the car, title loans also tend to be much larger than the typical payday loan – $959 vs. $392. On average, a title loan consumes half the average borrower’s salary, according to previous research from Pew Charitable Trusts. If the loan is not repaid, the lender has the right to become the owner of the car.

Read more: This family proves how costly it is to be poor.

“The typical borrower cannot afford [to pay back a loan that is] about 5% of their paycheck to make ends meet,” says Nick Bourke, Pew’s Small Dollar Loans Project Manager.

CFPB data shows that a third of title deed borrowers default on their original loan and one in five borrowers have had their car repossessed. Most title loans must be repaid within 30 days.

Some 80% of home loan borrowers take out another home loan once they have paid off their original balance. Thirty days later, almost 90% are borrowing these loans again. Overall, more than half of all securities loans tracked by the CFPB resulted in at least three additional loans and a third of all loans initiated resulted in seven or more loans.

So how do you solve a problem like securities lending? The CFPB’s response, so far, has been to propose new rules that would require these lenders to tighten their underwriting practices. The agency was supposed to publish these new rules in early 2016, but has yet to do so. Meanwhile, it also puts pressure on big banks and credit unions to help fill the void that will remain once payday lenders and title lenders are squeezed out of the market by tougher regulations. The idea is that traditional banks could offer small dollar loans at a relatively low interest rate to consumers in financial difficulty, giving them a much-needed alternative.

The real problem here is not that title loans and payday loans exist. It’s that the industry has yet to find a better alternative for consumers in financial difficulty.

There are reports that at least three major banks are testing a payday loan alternative, but for the most part banks are biding their time until new CFPB rules on small dollar loans are released. “If the CFPB sets standards, you’ll see a lot more banks come into this market and make loans that cost 6 times less than what payday loans and title loans cost,” Bourke said. “I don’t think you’re going to see banks offering auto title loans, but you might see banks giving small cash loans to existing checking account customers.”

Currently, only 1 in 7 federal credit unions offer an alternative payday loan, according to the Pew Charitable Trusts. Their business is a drop in the ocean – 170,000 such loans have been issued by credit unions in 2014, compared to more than 100 million total payday loans.

Plus, banks already have their own version of a small dollar loan – the overdraft fee, which happens to be a multi-billion dollar revenue stream. They don’t look or sound like a payday loan, but they have a similar effect. The majority of the time, transactions that resulted in bank overdrafts are $24 or less and are refunded within 3 days, depending on past searches by the CFPB. But the average bank will still charge that customer an overdraft fee of $34. That’s effectively a 140% interest charge on a three day loan.

Most people who turn to payday loans or title loans are simply trying to make ends meet, looking to pay their bills or pay their rent on time, according to Pew research. In a call with reporters on Tuesday, the CFPB declined to offer advice on where customers can go for alternative sources of emergency loans. The problem is, There are not a lot.

With wages stagnating and fixed costs rising, American households feel pressured by day-to-day expenses, let alone able to cover unexpected expenses. Sixty-three percent of people said they wouldn’t have the money to cover a $500 car repair or a $1,000 medical bill, according to a recent Bankrate survey.

Making small-dollar loans safer — but not impossible — to obtain seems to be the answer here. This is a delicate balancing act for regulators. The rules for lenders must be strict enough that small lenders cannot take advantage of financially vulnerable people, but not so tight as to bankrupt the whole industry.

Woodruff Mandi is a reporter for Yahoo Finance and host of Brown Ambitiona weekly podcast about career, life and money.

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