Home > Personal Finance > 1 in 5 Title Loan Borrowers Lose Their Car, Report Finds

Comments 1 Comment

About one in five drivers who take out a title loan ultimately have their vehicle seized by the lender, federal regulators said Tuesday when issuing a report on the high-cost, short-term lending practice.

Title loans are similar to payday loans, but are secured by a car or truck, meaning the borrower risks losing her vehicle if she falls behind. More than four out of five borrowers fail to pay off the loan in the initial borrowing period, and two-thirds renew the loan at least seven times, according to the Consumer Financial Protection Bureau. A high percentage of those who renew repeatedly ultimately lose their cars and trucks, the CFPB warned.

Nationwide, the title loan industry is roughly the same size as the payday loan industry, amassing $3.9 billion in fees each year from consumers, according to the Center for Responsible Lending. However, in some states, the title business far exceeds the payday business. In Mississippi, for example, title loans brought lenders $297 million in fees, compared with $230 million for payday loans. In Alabama, title loans totaled $357 million, compared with $125 million. Both states are in the top six for short-term loan fee volume, along with Ohio, California, Illinois and Texas.

The 20% seizure rate is higher than previously reported estimates, such as this one from a team of university researchers and this one from the Mercatus Center, which pegged the rate at about 10%.

The median car title loan is about $700, and the average is $959 — larger than payday loans since it’s based on the value of the collateral. The typical annual percentage rate is about 300%, the CFPB says. While the loans are advertised as one-time stopgaps for strapped consumers to pay bills, only 12% of borrowers manage to be “one-and-done – paying back their loan, fees and interest with a single payment without quickly reborrowing,” the CFPB said.

“Our study delivers clear evidence of the dangers auto title loans pose for consumers,” said CFPB Director Richard Cordray. “Instead of repaying their loan with a single payment when it is due, most borrowers wind up mired in debt for most of the year. 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.”

The report examined nearly 3.5 million title loans made to 400,000 borrowers from 2010 through 2013.

The CFPB is preparing new rules to govern the short-term lending industry and has issued numerous studies. Most recently, they reported online payday borrowers frequently end up losing access to checking accounts when they fail to make payments. The new short-term loan rules are expected to be released later this year.

Here are more detailed findings from the CFPB:

  • One in five borrowers have their vehicle seized by the lender: Single-payment auto title loans have a high rate of default, and one in five borrowers have their car or truck seized or repossessed for failure to repay. This may occur if they cannot repay the loan either with a single payment or after taking out repeated loans. Worse still, it may compromise the consumer’s ability to get to work or the doctor.
  • Four in five auto title loans are not repaid with a single payment: Auto title loans are marketed as single-payment loans, but most borrowers take out more loans to repay the initial debt. More than four in five auto title loans are renewed the day they’re due because borrowers cannot afford to pay them off with a single payment. In only about 12% of cases do borrowers manage to be one-and-done, that is, to pay back their loan, fees and interest with a single payment and not quickly reborrow.
  • More than half of auto title loans become long-term debt burdens: In more than half of these instances, borrowers take out four or more consecutive loans. This repeated borrowing quickly adds fees and interest to the original debt. What starts as a short-term, emergency loan becomes a long-term debt load for a consumer who’s already struggling
  • Borrowers stuck in debt for seven months or more supply two-thirds of title loan business: Single-payment title lenders rely on borrowers taking out repeated loans to generate high-fee income. In fact, more than two-thirds of the title loan business is comprised of consumers who reborrow six or more times. In contrast, loans paid in full with a single payment make up less than 20% of a lender’s overall business.

Improving your credit score can help you secure more affordable financing. You can see where your credit stands by viewing your free credit report summary, updated each month, on Credit.com.

More on Auto Loans:

Image: Fuse

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • playmissy

    Payday loans, title loans, pawn shops: the CFPB is cracking down on the only few credit options the working poor have. They need better access to the credit economy, not babysitting. Their choices certainly aren’t ideal, but they are choices. The bureau has no business restricting these forms of credit if they aren’t doing anything to facilitate better options as well.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team