When you are desperate for the cash and run out of options, you might be willing to risk your car to save time.
This is what happens with an auto title loan. You keep your car, but transfer title to the lender who uses the vehicle as collateral. If you don’t pay on time, the lender can repossess your wheels.
But the auto securities lending market is “plagued with problems,” including unaffordable payments and excessive prices, according to the report. a new report from the Pew Charitable Trusts.
“We have found that auto title loans share the same harmful characteristics as payday loans,” said Nick Bourke, director of the Pew Small Dollar Lending Project. “They demand lump sum payments that borrowers cannot afford and most customers end up having to borrow loans again and again.”
Fewer people use title loans than payday loans, but they are usually for larger amounts. And they generally have higher costs than payday loans, according to the Pew study. Plus, there’s the added risk of losing a major asset – your car – if the debt can’t be paid off.
One of the most important conclusions of this report: the average customer pays more in fees than the amount borrowed.
The average auto title loan is $ 1,000 and the monthly fee is $ 250 (equivalent to a 300 percent APR). This $ 1,250 payment is usually due in 30 days and is more than most borrowers can handle. Pew estimates that this is about 50 percent of most borrowers’ monthly income, so they renew the loan – over and over again. Add all of these fees together and the average customer pays $ 1,200 to borrow $ 1,000.
Auto title loans are touted as a way to deal with a temporary cash flow problem or emergency, but few people use them that way. Half of those polled by Pew researchers said they took out the loan to pay their regular bills.
The companies that offer securities loans pride themselves on filling a need for those who are not served by the banking system and other lending companies.
NBC News has repeatedly attempted to contact the American Association of Responsible Auto Lenders for comment, but has not received a response. We were also unable to reach anyone at TMX Finance, a major player in this market, which operates more than 1,350 TitleMax stores in 17 states.
On its website, Max Title says it was built on the idea of ”providing an alternative way to clients who for whatever reason couldn’t qualify for traditional loans or didn’t have time to wait weeks of deliberation. ‘approval”. The company says its goal is to “get you as much money as possible while keeping your payments manageable.”
A business model based on risky loans
Auto title loans are currently legal in 25 states. * Pew estimates that more than two million Americans use them each year, generating roughly $ 3 billion in income.
The Pew study also found that six to 11% of people who take out an auto title loan have their vehicle repossessed each year.
“They lend to people who cannot repay,” said James Speer, executive director of the Virginia Poverty Law Center. “These loans are really, really bad.”
Speer told NBC News he saw the damage that could result. Several clients of the legal center found themselves on the street because they could not afford their rent and car title loan, so they paid off the car loan. Others lost their jobs because their vehicles were taken back and they could not get to work.
“It’s really not a loan. It’s usurious loan, ”Speer said.
This is how William Sherod sees it. He borrowed $ 1,000 from an auto title lender in Falls Church, Va., Last year. Everything was fine until he ran out of $ 26 on a month’s payment. The lender repossessed his car and would not return it until he paid off the loan in full, plus repo fees. Sherod had to borrow the $ 833 from his family.
“They were really nice when I took out the loan, but when I got late I was treated like dirt,” he told NBC News. “They prey on you because they know you are desperate. It was a terrible experience. I would never do something like this again. “
Should we do something?
Pew wants state and federal regulators, especially the Consumer Financial Protection Bureau, either to ban these high interest and small loans, or to develop regulations to “mitigate the damage” identified by this new research.
The report suggests a number of ways to make these loans more transparent, affordable and secure:
- Ensure that the borrower has the capacity to repay the loan as structured
- Define the maximum authorized charges
- Distribute costs evenly throughout the life of the loan
- Require concise information
- Protect yourself against harmful repayment and collection practices
* Alabama, Arizona, California, Delaware, Florida, Georgia, Idaho, Illinois, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Mexico, Ohio, Oregon, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia and Wisconsin.