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Research at Vanderbilt

The trouble with car title loans is NOT people losing their cars

by | Posted on Monday, Apr. 1, 2013 — 12:19 PM

A title loan store in Nashville, Tenn. (Joe Howell/Vanderbilt)

The standard knock against car title loans is a toothless assertion that the transaction leads to people losing their cars and then their jobs because they have no transportation to get to work, say three researchers led by Vanderbilt’s Paige Marta Skiba.

“Repossession affects few borrowers, and our evidence indicates that most borrowers will not lose their only way to work because of repossession,” said Skiba, associate professor of law at Vanderbilt Law School. “Thus, prohibitions on title loans based on the premise that borrowers are frequently losing their vehicles are misguided.”

Title loans are high-cost, short-term small loans secured by a vehicle that the borrower usually owns outright. Such loans, along with payday loans, are used by many people who are shut out from the mainstream banking system. The most common term for title loans is one month, and the interest rate is usually around 300 percent – when expressed as an annual percentage rate.

If the borrower defaults on the loan, the lender can repossess the borrower’s vehicle.

Skiba, Vanderbilt economics Ph.D. student Kathryn Fritzdixon and Jim Hawkins, assistant professor of law at the University of Houston Law Center, surveyed 400 title loan customers in three states (Georgia, Idaho and Texas) in partnership with a title lending firm in November and December 2012. The three states have distinct approaches to regulating title loans, but enough similarities to allow meaningful comparisons.

Their study, Dude, Where’s My Car Title?: The Law, Behavior and Economics of Title Lending Markets, can be read at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2224247. It will be published this year in the University of Illinois Law Review.

Paige Marta Skiba (Vanderbilt Law School)

The study showed that less than 10 percent of vehicles involved in title loans ended up being repossessed. Moreover, less than 15 percent of borrowers said they had no other way to get to work if their car were repossessed.

“While not insignificant, this small percentage suggests that the dire consequences that critics predict are unlikely to occur for the vast majority of title borrowers,” Skiba said. “Rough calculations would place the percentage of title borrowers who lose their jobs as a result of title lending at 1.5 percent.”

Regulators could be of some help to title loan consumers, Skiba said. The research shows that most title loan customers are overly optimistic that they will pay back their loans on time, which means the loan ends up costing them much more than they believe it will when they first receive it.

“Policymakers should require that title lending companies post information about how people actually use title loans: information about the number of times people roll over their loan, the amount of money those rollovers cost in total, the number and amount of late fees and other fees people pay, and the likelihood of defaulting on the loan,” the study reads. “Research has demonstrated in real world markets that disclosure rules can be used to inform people about how others use the loans, which can change their expectations about their own use of the product.”

Contact:
Jim Patterson, (615) 322-NEWS
jim.patterson@vanderbilt.edu


  • sarahsmile 90

    Title loans are very costly and even if you manage not to have your car repossessed, it is so difficult to get caught up on your finances with this type of loan.

  • http://www.facebook.com/ted.newell.98 Ted Newell

    Good point Bdness. The comparison with cash advance is weak. Isn’t it more like a bail bond? Also, the risk is very high for title loan companies. Of course fees are going to be high.

  • Stephanie Lombardo

    Had you paid your loan back in 1 day it would have cost you about $2 anyways however most states have a borrowers right of rescission so that you would not be charged the following day for returning the loan amount in full and would in fact waive that days worth of interest. Please be informed before making a stupid statement..

  • Stephanie Lombardo

    That’s not how it works. Title lenders lend based on the vehicle value. If you somehow scored a deal where you got a $8,000 vehicle for $900 then you’ve made money but if you bought a $900 car that was worth $1000 they wouldn’t give you more than $500.

  • ray

    These places should be illegal everywhere, no matter how much you need financial help getting a loan on your vehicle should not be an option, its just another way to take advantage of people struggling to make ends meet.

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