Three hundred percent annual interest? A high likelihood of taking out numerous loans over the course of months before the short-term debt is paid? A 20 percent chance you’ll lose your car?
Welcome to the world of single-payment auto-title lending, aka payday lending for car owners.
A new study released Wednesday by the U.S. Consumer Financial Protection Bureau (CFPB) looked at 3.5 million loans taken out over a four-year period ended in 2013 and found that one in five borrowers lost their vehicles because they couldn’t pay off the loans. Only 12 percent of borrowers manage to take out the short-term loans and pay it off in one go. The rest wound up wracked with fees and high interest.
“High rates of re-borrowing drive up costs, with the consumer eventually paying interest and fees that are far more than they expected,” CFPB Director Richard Cordray, said in a prepared statement. “For a sizable percentage of borrowers, the fees and interest exceed the amount of the initial loan itself.”
Along with other payday lending services, tens of millions of people living paycheck to paycheck find the loans attractive because the money can be acquired immediately. Payday lending has increased along with the rise of low-wage industries that have supplanted living-wage American jobs in recent decades.
The research found that two-thirds of the title loan business comes from borrowers who spent seven months or more paying off the loan, plus interest and fees. At the typical 300 percent annual interest rate, that means a short-term, high-interest loan winds up being a costly, monthslong debt puzzle.
Single-payment auto-title loans act essentially like payday loans, except instead of offering a pre-signed check or access to a borrower’s bank account for electronic withdrawal come payday, borrowers provide lenders with the title to their vehicle. Within a month, borrowers then “buy” back their titles, plus interest and fees. But if borrowers can’t make that single payment, then they extend their loan terms — often, by months.
Twenty U.S. states allow these single-payment terms, while five permit these loans as long as they offer installments.
The CFPB is considering proposals to leash what it calls “payday death traps,” but the payday lending industry has spent millions of dollars — giving money to both Democrats and Republicans — to keep the status quo in their industry. Click here for a list of lawmakers that take money from the payday lending industry.