WASHINGTON (3/26/15)--Car-title loans, where borrowers hand over the title to their vehicles as collateral to secure a cash advance, cause many of the same problems seen with payday loans, The Pew Charitable Trusts has found in a new report.
One of the biggest drawbacks of the product, which more than 2 million Americans use every year, is that the loans can lead to unmanageable balloon payments that can push borrowers deeper into debt.
"We found that auto-title loans share the same harmful characteristics as payday loans," said Nick Bourke, Pew small-dollar loans project director. "They require balloon payments that borrowers can't afford, and most consumers end up having to re-borrow the loans repeatedly."
What's more, a car-title loan can carry even higher costs than payday loans, as a borrower faces the additional risk of losing their car, which for some is their only form of transportation, Bourke added.
The report did note, however, that some credit unions serve members who have damaged credit by offering low-rate installment loans that can be secured with car titles.
"Depository institutions are better positioned to offer lower-cost title loans than are stores that sell only a small variety of financial products to a limited population," the report said.
Still, Pew hopes the findings will encourage the Consumer Financial Protection Bureau to enact regulations that either prohibit high-interest, small-dollar loans or at least make them more transparent, affordable and safe through key reforms.
Key findings from the report include: