Payday loans aren’t the only type of expensive consumer credit that starts off as a short-term financial solution, but often turns into long-term debt traps, according to a report released Tuesday by the Consumer Financial Protection Bureau.
Consumers who take out auto loans are often unable to pay by the due date and repeatedly refinance to retain possession of their vehicles, the bureau found after analyzing millions of loans. Even then, around 1 in 5 borrowers lose their wheels, according to the analysis.
The report is the latest in a series of studies released by the federal agency because it advocates a broad set of new rules governing companies that provide short-term consumer loans, usually at high interest rates. . The office is expected to publish the proposed rules in the coming weeks.
Previous reports have focused on payday lenders and the consequences of payday loans, such as overdraft fees associated with missed payments. The latest report focuses on a different, albeit similar, category of lenders who would also be subject to the rules proposed by the bureau.
“Although these [auto-title] Products are typically marketed for short-term financial emergencies, the long-term costs of such loans often only make the situation worse, ”CFPB director Richard Cordray said in a conference call with reporters. Tuesday. “These loans … present similar problems to those we have encountered with payday loans.”
The report focused specifically on single payment auto title loans, which are similar to payday loans in that they are expected to be repaid in a lump sum, usually after one month.
Compared to payday loans, auto title loans tend to be larger and have slightly lower interest rates, although they come with one big problem: borrowers need to post collateral for these. loans, giving the lender the right to take their car if they can. does not pay.
One-off auto title loans are available in 20 states, including Oregon, Nevada, and Arizona, although they are not offered in California.
The report did not examine automatic installment loans, which are typically larger than single payment loans and are structured to be repaid over time. CFPB researcher Jesse Leary said the office is also investigating this type of loan, which is available in California.
The report found that at maturity, borrowers had to take out new loans, often from the same lender, to repay old ones. Most have taken at least three loans in a row, and some have taken 10 or more in a row, leaving them in debt for months instead of weeks.
This is similar to the CFPB’s findings in the payday loan reports, which are structured to be repaid on the borrower’s next payday. Paying off the loan often leaves borrowers in the hole, and they can end up borrowing multiple times over several months. The CFPB and consumer groups have called the loans “debt traps”.
Part of the appeal of auto title and payday loans is that they offer you quick cash. A report by Pew Charitable Trusts on automatic securities lending found that customers choose lenders based not on their prices, but on their speed and convenience.
Some auto title lenders advertise that they do not check a borrower’s credit at all, only requiring that borrowers own their cars and that the vehicles pass an inspection.
The next CFPB rules would likely force lenders to change this practice.
A draft of the proposed rules released last year requires lenders to review borrowers’ income and expenses to ensure they have enough income to pay loan repayments. The rules would also limit the number of times a loan can be refinanced – a move the industry says would cut off credit to some borrowers.
The rules would apply to all loans that must be repaid within 45 days, as well as longer loans that carry interest rates above 36% and are either secured by auto titles or repaid by bank draft. Automatique.
The CFPB report on payday lenders questioned the practice of collecting payments directly to borrowers’ bank accounts using electronic debits. The report found that about half of all borrowers missed at least one payment, resulting in overdraft fees or other charges from their banks. On average, these borrowers paid bank charges totaling $ 185 over 18 months.
The CFPB’s proposal should require lenders to notify customers before attempting to collect payment into a bank account.
Dennis Shaul, Managing Director of the Consumer Financial Services Assn. of America, told a Congressional subcommittee in February that CFPB rules would bankrupt some lenders and leave potential borrowers without access to the quick credit they need in an emergency.
“The office seems unaware that these products have arisen because clients have urgent needs and those needs will not go away even if the lenders offering these products do,” Shaul said.