Auto Title Loans: Like Payday Loans, But Larger and Riskier

The Pew Charitable Trusts today released a report focusing on the market for auto title loans. The report brings together data from a wide variety of sources (including Slips contributor Nathalie Martin's work) to provide a clear, succinct, and thorough overview of the mechanics of this under-studied industry. It also, and most interestingly, includes the results of Pew's nationwide survey of borrowers and discussions with focus groups.

The empirical data underscore how similar auto title loans are to payday loans, and how regulation of this part of the alternative finance industry also is greatly needed. The report is particularly timely in light of the Consumer Financial Protection Bureau's anticipated upcoming release of payday loan rules, and its field hearing tomorrow in Richmond on payday lending.  

People reported taking out auto title loans for similar reasons as to why they take out payday loans: they make less than $30,000 a year and primarily need money to meet everyday expenses, though some use the money to pay unexpected expenses. People also reported having other options to borrow money or cut expenses. Even so, they focused on the ease of getting money, relying on lender location and advertisements, and word of mouth, rather than comparison shopping or considering other ultimately less expensive ways to obtain credit. What is perhaps most disturbing is that a sizable portion of people reported paying back these loans via the exact means that they rejected when taking out the loans: borrowing from friends and family, going to banks or credit unions, and using credit cards.

This outcome is particularly troubling because auto title loans are both larger and riskier than payday loans. The average title loan amount is $1,000. In contrast, payday loans average about $350. As with payday loans, that $1,000 is due quickly, usually in 30 days. And as with payday loans, most people do not have the $1,250 (an APR of 300%) due at the 30 day mark. Indeed, $1,250 represents 50% of the average borrower's gross monthly income; lenders know this and expect that borrowers will not be able to repay in 30 days. Thus, the loan rolls over (and over and over), and people ultimately pay $1,200 in fees annually for that $1,000 loan.

In addition, and distinct from payday loans, the consequence of not repaying an auto title loan may be disastrous. Many people need their cars to get to work, and if they do not repay the loan, the lender can repossess and sell the car. Without the car, their likelihood of being able to repay the loan plummets. Though the Pew report found that only about 10% of borrowers have their cars repossessed, the threat of repossession likely weighs heavy on borrowers' minds. The stress of not being able to pay back debt in general has been shown to negatively affect people's health and relationships. The stress of not being able to pay back a title loan, combined with the threat of repossession, likely makes these loans especially vexing and harmful.

The report ends with recommendations about how this industry should be regulated both to bring down the cost of auto title loans and provide borrowers with feasible repayment schedules. I think the recommendations about how to establish affordable installment payment schedules would be particularly effective to combat some of the most harmful problems that people encounter when trying to payback these loans, while still allowing people with borrowing needs to access money quickly. As the report notes, many of these recommendations align with prior recommendations (including from Pew) about effective regulations for payday loans. As such, as the CFPB thinks about payday loans, it likewise should consider extending some of the rules to the similar, yet seemingly more treacherous auto title loan market.