After years of alerting consumers to the dangers of high-cost credit products such as payday loans and fee-based overdraft protection, the Consumer Federation of America is sounding the alarm on a new threat: car title loans.
"Car title loans are the latest in a set of fringe credit products that are really a problem for lower-income consumers," said Jean Anne Fox, the group's director of consumer protection.
Speaking at a Nov. 17 press conference, Ms. Fox announced the release of the federation's study "Driven into Debt," which outlines the "latest, fastest-growing form of high-cost, high-risk loans."
Car title loans are a form of credit used by cash-strapped consumers who agree to hand over the title to their vehicles to secure short-term loans, usually one month in duration. The interest rates on such loans generally run about 25% a month, or 300% a year.
When borrowers are unable to repay the loan in full at the end of the month, lenders usually allow them to pay the interest and roll over the principal. As interest accrues and additional fees are tacked on, consumers can quickly become trapped in a dangerous cycle of debt, Ms. Fox said. When the borrower has nothing left to pay, the lender has the right to repossess and sell the borrower's car.
The study found that most lenders obtain a duplicate set of keys when they finalize the loan, which "makes it possible for the lender to come in the dead of night and drive your car away," Ms. Fox said.
Car title lenders will only accept vehicles that have been paid in full to serve as collateral. The loans are offered through title-lending stores - which are in about 25 states - and online at such sites as www. 24hourautoloan.com.
Most loans are made for up to 50% of the car's value, but the study found one particular lender that advertised a loan of up to $50,000.
Ms. Fox urged state lawmakers to close the loopholes that allow car title lenders to operate and to reject the business model that ensnares people in debt by threatening to take away what is often their most valuable asset.
The study drew from a survey of 81 car title lending stores in 11 states, a review of 17 online lenders, and an examination of applicable laws in all 50 states.
