Report Shows the Cost of Auto Title Loans

We look at a joint report from the Consumer Federation of America and the Center for Responsible Lending that presents information about loans secured with a vehicle title.

Since loans for people with bad credit usually require collateral and are almost always more expensive than other types of funding, it shouldn’t be a surprise that car title loans – which are secured by having the customer transfer vehicle ownership over to the lender during the life of the loan – include a hefty price tag.

Still, a startling report (shown below) from two major consumer organizations, shows just how expensive this type of funding can be.

Here are three key findings from the report on U.S. auto title loan users:

  • Overall, customers pay a total of $3.6 billion a year in interest for $1.6 billion in loans.
  • The average APR is 300 percent.
  • Customers renew the funding eight times on average.

The data further shows that a borrower will typically receive a loan for about 26 percent of his or her car’s value. If the borrower is unable to pay off the loan, the lender may take the car, while also keeping whatever payments had been made so far. On top of losing his or her car, the report found that one out of every six loan customers receive a repossession fee. The charge is usually between $350 and $400

The report compares title loans to payday loans, showing that the average interest and fees for a payday loan is $16 per $100 borrowed, while the average for a title loan is $25 per $100 borrowed. Because the typical loan term for a payday loan is shorter than for a title loan, the APR tends to be less for a title loan.

Some of the data presented in the report is based on “a weighted average from several states that record their per-loan average,” as well as from a claim made by the president of TitleMax, who said that the average customer renews a title loan eight times.

The report also includes recommendations on how auto title loan products could be improved. These suggestions include setting the loan amount to $2,500 or less, increasing the loan term to at least 90 days, capping the APR at 36 percent, enforcing a stricter risk assessment model to ensure the customer will be able to pay back the loan on time, and adding protections for the customer in the event that he or she may default on the loan.

You can view the report below.