Sara Routhier, Managing Editor of Features and Outreach, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming worl...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Mar 5, 2013

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According to a new study by the Center for Responsible Lending (CRL) and the Consumer Federation of America (CFA), car title loans cost American consumers $3.6 billion a year in interest.

The report states that an estimated 7,730 car title lenders operate in at least 21 U.S. states. Each year, these businesses cost borrowers $3.6 billion in interest on loans worth $1.6 billion.

Car title loans, secured by the title on a vehicle, are labeled as short-term loans, but they tend to extend for months longer than initially predicted.

On average, a title borrower renews the loan eight times. At the end, an average loan of $951 costs the borrower $2,142. The interest charges and fees total $1,191, more than the average size of the car title loan itself.

“Most car-title loans — though structured as short-term — repeatedly generate new interest and origination fees for the lender upon each renewal,” the report said.

The report focused mainly on 30-day title loans with balloon payments due at the end of a term.

According to the findings, car title loans are commonly advertised with 25 percent interest per month, which equates to a 300 percent APR. The report stated that the APR rates are “especially excessive considering the value of the collateral and the relatively low amount of the loan.”

The median loan-to-value (LTV) ratio for borrowers was 26.4 percent, which means the average value of a borrower’s collateralized car was worth much more than the loan they took out. For example, the median car was valued at $3,150 yet the median auto title loan was only $845.

The low LTV ratio is for lender protection.

“In the absence of meaningful underwriting, lenders protect themselves from losses on car-title loans by lending a relatively small percentage of the car value and threatening repossession to ensure that the borrower decides to prioritize servicing their car-title debt over other obligations,” the report said.

For car title loans, one in six loans incurred a repossession fee, which ranged between $350 and $400. This unexpected cost added to the overall cost for borrowers.

“The repossession fee … is added to the borrower’s running balance, causing the borrower to become even more indebted despite also losing the collateral,” the report said. “These fees and others, despite the low loan-to-value ratio, mean nearly all proceeds of the repossession sale go directly to the lender.”