The Cumulative Costs of Predatory Practices

Debt-Trap Lending
Car-Title Loans
Car-title loans are expensive loans averaging more than $1,000 that are secured by the title to
a vehicle that the borrower owns free-and-clear. They are traditionally offered as payday-loan-like
single-payment loans with one-month terms, which tend to be renewed multiple times like their
payday counterparts. An emerging practice is a movement toward longer-term and still high-cost
installment products.
The very structure of car-title loans leads to problems for consumers, including excessive repayment
fees and repossessions. Car-title loans use the car—an essential asset for most families—as collateral
and generally require full repayment within a month. Borrowers typically cannot afford to repay
these loans and pay their regular living expenses, so they typically take out loan after loan, re-paying
the substantial fee to re-borrow the principal. The threat of repossession, which can put in danger
borrowers’ ability to get to work and earn a living, means that they prioritize paying the loans, even
if they cannot afford them. The typical car-title borrower takes out nine one-month loans per year at
300% APR, paying $2,349 in fees alone for a loan of only $1,042. The national car-title market is
large: CRL estimates that there are over 8,100 stores that originate 2 billion loans per year, with
borrowers paying $4.3 billion in fees.
Policy Recommendations:
• States and Congress should limit the APR on car-title loans to 36%.
• CFPB, which is poised to promulgate rules addressing the car-title lending debt trap, should
require lenders to determine the borrower’s ability to repay the loan without re-borrowing,
including consideration of income and expenses.
• States that continue to authorize car-title lending should require that loans be structured as
installment products with amortizing equal monthly payments, full consideration of the borrower’s
ability to repay the loan and afford other expenses, and reasonable rate limitations.
• States should vigorously enforce their laws and work in partnership with federal regulators to
address attempts at subterfuge.
• Federal regulators—including the Department of Justice, FTC, and CFPB—should use their
enforcement authority to address violations of law.
• Borrowers in default should receive consumer protections, including notice prior to repossession or
sale of the vehicle, a right to redeem the vehicle, and a ban on deficiency balances (in which the
borrower owes fees to the lender if the sale of their car does not cover the outstanding debt owed).
In addition, the sale of repossessed vehicles should be required to be commercial reasonable, with
any surplus returned to the borrower.
Overdraft Loans
Overdraft fees cost consumers approximately $16.7 billion every year. Overdraft loans originally
started a courtesy extension of credit to consumers for shortfalls in their checking accounts, but they
have since turned into a revenue-creating machine for banks. The median overdraft fee is $35, and
the median size of the triggering transaction is under $20, which results in a very high-interest, very
short-term loan.
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The State of Lending in America & its Impact on U.S. Households