More than 1.1 million households in the U.S. used auto title loans in 2013, according to a survey by the Federal Deposit Insurance Corp. - the first time the agency has included such loans in its annual survey.
Title loans are becoming a more prevalent form of high-cost, short-term credit in subprime finance even as regulators in many states continue a crackdown on similar high-interest payday loans. For many borrowers, title loans, also sometimes known as motor-vehicle equity lines of credit or title pawns, are having disastrous financial consequences. Many people are losing their vehicles and plunging further into debt.
Of more than three dozen auto title loan agreements recently reviewed by the New York Times it was found that after factoring in various fees, the effective interest rates ranged from nearly 80% to more than 500%. While some loans come with terms of 30 days, many borrowers, unable to pay the full loan and interest payments, say that they are forced to renew the loans at the end of each month, incurring a new round of fees.
A former president of TitleMax, for example, disclosed in a 2009 deposition that customers typically renewed their loans eight times. Because many lenders make the loans based on an assessment of a used car's resale value, not on a borrower's ability to repay, many people struggle to keep up almost as soon as they drive away with the cash. Roughly one in every six title-loan borrowers will have the car repossessed, according to an analysis of 561 title loans by the Center for Responsible Lending, a nonprofit based in Durham, N.C.
Lenders argue that they are providing a source of credit for people who cannot obtain cheaper loans from banks. The high interest rates, the lenders argue, are necessary to offset the risk that borrowers will stop paying their bills.
Title loans are part of a larger lending boom tied to used cars. Auto loans allowing subprime borrowers - those with credit scores at 640 or below - to buy cars have surged in the last five years.
High interest rates on title loans have led to an influx of Wall Street money. Private equity firms are investing in lenders and some big banks are boosting their auto lending to people with credit troubles.
Helping fuel title loan lending is the central role having a vehicle plays in people's lives. A car is vital to participating in the work force in most areas of the U.S. and lenders are betting that people will do about anything to keep their cars, including choosing to make auto loan payments before paying for just about any other expense.