A rule to make these loans less problematic is being put on hold-possibly permanently
A rule scheduled to go into effect on August 19 that would make car title loans a less risky ride has been delayed for 15 months by the Consumer Financial Protection Bureau.
These loans, in which borrowers put up their car as collateral, can be hazardous indeed. One in nine car title borrowers fall behind on payments and have their vehicles repossessed, according to a 2015 Pew study (PDF).
Known as the underwriting provision, and first proposed by the CFPB when Barack Obama was president, the now-delayed provision was intended to prevent people with limited resources from getting car title loans they couldn’t afford in the first place. It would require lenders to make sure that borrowers had the financial ability to pay their loans back before granting them.
Under President Trump, the CFPB has already drafted a proposal to do away with the underwriting provision after the delay.
Like payday loans, car title loans-also known as auto or vehicle title loans, or simply title loans-are tempting to people who need a substantial amount of cash quickly and have few other options to get it. They are usually for 30 days and for sums averaging $959 (PDF).
But they are expensive. While some states cap interest rates, others don’t. And according to the Federal Trade Commission, lenders, on average, charge 25 percent interest per month, the equivalent of a 300 annual percentage rate (APR). (In contrast, the typical credit card charges 16 percent to 26 percent APR.) And this doesn’t count hundreds of dollars in additional fees, says Bruce McClary, vice president of marketing of the National Foundation for Credit Counseling.
So, for example, if you borrow $1,000 for 30 days at 25 percent a month interest, you’ll owe at least $1,250 one month after taking the loan (the $1,000 original loan amount plus $250 in interest plus fees). If you can’t pay within that month, you can roll the debt over for another month-in some states, rollovers happen automatically-accruing more interest and fees.
Many borrowers, unable to pay on time, find themselves with multiple loan rollovers and thus caught in a debt trap that could eventually cost them their car. Car seizure, of course, can lead to many new problems if it means they’re no longer being able to get to work or to the store to buy food.
That’s what’s happening to Amber DuBois, 34, of Cedar City, Utah, a single mother of four and a full-time electronics engineering student at Southern Utah University. She was on the verge of falling behind on her rent and bills, and didn’t have time to wait for the $3,000 in scholarship money she was expecting. So she took a $3,000 title loan on her 2010 Kia Soul, intending to pay it off in a month.
To her dise through it was a third the size she expected. In the months that followed, DuBois rolled the loan over twice, paying interest and fees that were almost as high as rent. After that, she couldn’t keep up with the payments and simply stopped making them.
“Right now I’m installment loans NM on a default status, which means I’m waking up every single day praying that my car is still outside,” she says.
How the Title Loans Industry Works
Her story is far from uncommon, the Pew survey found. Only 12 percent of car title borrowers succeed in paying a 30-day loan in time. Most are forced to roll the loan over for one or more additional months, and almost 40 percent roll the loan over seven or more times before they are through.