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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Apr 3, 2013

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According to a research paper discussed on Vanderbilt University’s latest news update, car repossession is a rare occurrence for auto title loan borrowers.

Car repossession, which results when auto title loan borrowers default on payments, is often alleged to result in a chain reaction of repercussions. Consumer activists who oppose auto title loans claim that repossessing a car results in borrowers being unable to commute to work, which in turn results in job loss, unemployment and even eviction or homelessness.

The research paper, cleverly titled “Dude, Where’s My Car Title?: The Law, Behavior, and Economics of Title Lending Markets,” surveyed 400 auto title loan borrowers from Georgia, Idaho and Texas in order to ascertain the validity of these arguments.

One of the researchers, Professor Paige Marta Skiba, spoke to the Vanderbilt University’s news and explained that the research showed less than 10 percent of vehicles were repossessed. Even more interestingly, she said that the percent of auto title loan borrowers who lose their jobs due to repossession was a meager 1.5 percent.

Some of the research found that borrowers were overly confident and unduly optimistic about their ability to repay their auto title loans on time. This was more so a result of borrowers misunderstanding the terms of financing.

Professor Jim Hawkins, one of the three of researchers, told how regulation can help borrowers by simplifying auto title loan lending.

“I think regulation would help people better understand how they are likely to view auto title loans,” he said. “Texas, for instance, requires auto title loan lenders tell consumers how long it takes other consumers to repay their loans. It can help people gauge how much the loans will cost over time.”

The research’s findings do beg the question: If auto title loans result in only a few repossessions, then why do consumer advocacy groups shout for increased regulations or bans?

Hawkins explained that activists often have preconceived notions of widespread repossessions when in fact there aren’t any studies to show that.

However, he did offer some advice for prospective borrowers.

“They should look at other patterns of repayment and realize they will probably be in this for several months,” he said. “And they should realize things change. Think of all the things that might go wrong.”

The Professor also advised borrowers on what to look for when seeking an auto title lender, whom unlike payday loan lenders, offer far more varied terms and interest rates.

“I would try to call a bunch of places,” he said. “Better yet, just figure out how much it is in actual dollars. Tell them you want a $500 loan and compare. By federal law they are required to tell you an annual percentage rate.”

The research paper is scheduled to be published later in the year in the University of Illinois Law Review.