Car Title Loans Cost Consumers $3.6 Billion in Yearly Interest
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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.”