Auto title loan borrowers often find themselves in debt cycles, and many have their vehicles seized due to their inability to repay the loan, according to a Consumer Financial Protection Bureau (CFPB) report.

“Auto title loans, also known as vehicle title loans, are high-cost, small-dollar loans in which borrowers let a lender hold the title to their car, truck or motorcycle in exchange for a loan amount,” CFPB explains.

“The lender takes a security interest in the borrower’s vehicle and the loan approval and amount is primarily based on the vehicle’s value, rather than a credit check and traditional underwriting.”

One third of borrowers default on these loans, while one in five has their vehicles seized due to inability to repay the loan at the end of the month-long contract.

Four in five auto title loan borrowers extend the loan contract through reborrowing rather than paying off the loan, and only one in eight are able to pay back the initial loan (plus interest and fees) without defaulting or extending the loan.

The average loan was $959 with an annual percentage rate of nearly 300 percent, and over half of all customers reborrowed three or more times on their initial loan.

“Auto title lenders typically generate about two-thirds of their business from the borrowers who end up being mired in debt for most of the year,” CFPB director Richard Cordray said. “It is evidence of the long-term pitfalls of this form of borrowing and another sign that so-called single-payment loans are often anything but that in reality.”

He added, “These loans thus present issues that are similar to those we have found with payday loans. … [F]or a sizable percentage of borrowers, the fees and interest exceed the amount of the initial loan itself.”

The full report is available here, and a summary of the findings is available here.

Editor’s note: A free PDF resource sheet on payday loans and predatory lending is available here.

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