In today's still-struggling economy, many consumers find themselves short on cash. When consumers seek a credit remedy, one particular lender is likely to bring more problems than solutions: companies that make car title loans.
According to new joint research report by the Consumer Federation of America and the Center for Responsible Lending (CRL), the average car-title loan of $951 winds up costing the typical borrower $2,142 in interest. Nationwide, 7,730 car-title lenders in 21 states reap $3.6 billion in interest on loans valued at only $1.6 billion.
The car-title loan uses a borrower's personal vehicle as collateral and additionally charges triple-digit interest rates, like those of payday loans. And similar to payday loans, the typical car-title loan requires full repayment in just one month. When borrowers cannot afford to pay in full, they are forced to renew their loan by paying additional interest and fees. The report found that a typical customer renews their loan eight times.
The report also found anecdotal instances in which car-title lender marketing practices have lured consumers by advertising 25 percent interest per month for a two-week loan. The actual rate of interest, however, equates to 300 percent annual percentage rate (APR). And it's not as though 300 percent APR is an offsetting risk to the lender: Car-title loans are usually made for only a fraction of the vehicle's market value - approximately 26 percent.
When borrowers can no longer keep up with interest payments, cars are repossessed and yet another fee is added to the borrower's debt. On average, these repossession fees run in the range of $350-$400 or about half of the borrower's remaining loan balance. The report found that one in six consumers was charged expensive repossession fees.
It's easy to sum up the central problems with car-title loans. As the authors write in the report, these loans "carry inherently unsuitable terms that cause already vulnerable borrowers to pay more in fees than they receive in credit while putting one of their most important assets at risk."
If you're thinking that there ought to be a law against this obviously predatory product, be sure to tell your state legislators. Most states with car-title loan laws either have no interest rate caps, or authorize triple digit interest.
Tracking how these loans affect consumers is one thing; financial reforms are quite another. In this regard, the CFA -CRL report calls for public policy actions at the state and federal levels.
For example, the federal Consumer Financial Protection Bureau could enact protections addressing loan terms and underwriting. States, on the other hand, could adopt rate caps of 36 percent on these loans.
Other policy recommendations include:
-- Changing loan terms to equal monthly payments that would enable borrowers to gradually pay down their debt;
-- Require written notice prior to borrowers and the right to redeem the vehicle before lenders repossess or sell the car; and
-- In the event of a vehicle sale, return to the borrower any surplus between a new sales price and the remaining amount of money owed
In 2006, similar consumer protections were enacted to protect the military and their families. If President George W. Bush and Congress could agree to cap small loans at 36 percent annually for this consumer sector, it seems reasonable that the rest of us should be given the same protections.
Charlene Crowell is a communications manager with the Center for Responsible Lending