300 Percent Interest Makes Borrowers Pay Twice What They Receive in Credit

Durham, N.C.--Car-title loans cost borrowers $3.6 billion in interest each year, more than twice the $1.6 billion in credit borrowed, a new report from the Center for Responsible Lending (CRL) and Consumer Federation of America (CFA) shows. For the full report, go to http://rspnsb.li/13ZMZ8V. "Driven to Disaster: Car-Title Lending and Its Impact on Consumers," provides the first national estimate of the size of the car-title loan market and details its potentially devastating impact on consumers.

Car-title loans are high-cost loans most often structured as a small, 30-day debt secured by the title to a vehicle owned outright by a borrower. These loans share many of payday loans' predatory features: A triple-digit interest rate, a balloon payment at the end of the loan's term, and—critically—a failure by the lender to evaluate a borrower's ability to repay. Car-title loans also produce the same effect that payday loans do: A debt trap that leaves too many borrowers worse off than when they started. The new report found, for example, that one in six car-title borrowers studied faced repossession, endangering what often is often a family's most important asset: their car. Repossession fees compound the damage, piling additional costs on the borrower that typically equal half of the outstanding loan balance.

The report also found that:

  • Approximately 7,730 car title lenders operate in 21 states and make 1.7 million loans annually.
  • The average car-title borrower renews a loan eight times, paying $2,142 in interest for $951 of credit.
  • A typical borrower receives cash equal to only 26 percent of a car's value, yet pays 300% APR.

These findings underscore the need for strong consumer safeguards in car-title lending. CRL and CFA recommend that states with reasonable rate caps not grant exemptions to car-title lenders, and that states vigorously enforce them, as car-title lenders often take advantage of loopholes or gaps to avoid compliance. In addition, regulators should require car-title lenders to:

  • Structure this type of credit as an installment loan, with reasonable limits on interest;
  • Evaluate a borrower's ability to repay before making a loan;
  • Provide borrowers with protections in case of default, such as notifying them prior to sale or repossession.

For more information, contact Kathleen Day in DC at 202.349.1871 or kathleen.day@responsiblelending.org; Graciela Aponte in Calif. at 510.379.5518 or graciela.aponte@responsiblelending.org; or Ginna Green at 510.379.5513 or ginna.green@responsiblelending.org.