Analogizing to payday loans, a new report from the Consumer Financial Protection Bureau (CFPB) said research revealed that auto title loans reflect high rates of reborrowing that can lead to long-term "debt traps" where a borrower cannot repay the initial loan by the due date and must reborrow or risk losing their vehicle.

What happened

The Bureau defined auto title loans (also known as vehicle title loans) as "high-cost, small-dollar loans borrowers use to cover an emergency or other cash-flow shortage between paychecks or other income." Borrowers use their vehicles as collateral for the loans, with the lender holding the title in exchange for the loan amount. The typical loan amount is about $700 with an annual percentage rate of 300 percent, the CFPB said.

For the auto title loans in the report, a borrower agreed to pay the full amount owed in a lump sum plus interest and fees by a certain day. Only 20 states permit this type of loan, the Bureau said, with five other states allowing auto title loans that are repayable in installments. The CFPB examined about 3.5 million anonymized, single-payment auto title loan records from nonbank lenders from 2010 to 2013, analyzing loan use patterns such as reborrowing and rates of default.

The agency was not happy with what it found, noting similarities between auto title loans and payday loans such as high rates of consumer reborrowing and high costs in fees and interest, with "collateral damage" to a consumer's life and finances.

One in five borrowers who take out a single-payment auto title loan have their car or truck seized by their lender for failing to repay the debt, according to the report, while more than four in five of the loans are renewed the day they are due because borrowers cannot afford to repay them with a single payment. Just 12 percent of the loans studied by the Bureau were "one and done," where borrowers paid back their loan fees and interest with a single payment without reborrowing.

More than half of the auto title loans became what the CFPB characterized as "long-term debt burdens," where borrowers took out four or more consecutive loans. "This repeated reborrowing quickly adds additional fees and interest to the original amount owed," the Bureau wrote. "What starts out as a short-term emergency loan turns into an unaffordable, long-term debt load for an already struggling consumer."

The CFPB's research also showed that greater than two-thirds of auto title loan business comes from borrowers who take out seven or more consecutive loans, with less than 20 percent of a lender's overall business composed of loans paid in full in a single payment without reborrowing.

To read the "Single-Payment Vehicle Lending" report, click here.

Why it matters

"Our study delivers clear evidence of the dangers auto title loans pose for consumers," Bureau Director Richard Cordray said in a statement about the report. "Instead of repaying their loan with a single payment when it is due, most borrowers wind up mired in debt for most of the year. The collateral damage can be especially severe for borrowers who have their car or truck seized, costing them ready access to their job or the doctor's office." In the fourth report in the CFPB's series of studies on small-dollar loans, the agency said the findings from the auto title loan research would help shape proposals to regulate the market, such as requiring lenders to take steps to determine whether borrowers can repay their loan and still meet other financial obligations. Critics have challenged the data used in the Bureau's report as well as the assumption that borrowers are unable to repay loans, ignoring the possibility that a consumer may choose to default on the loan for various reasons, such as the condition of the vehicle. But the CFPB remains concerned with auto title loans, which are within the scope of the CFPB's recently published proposed rules on small-dollar lending.