The boom in auto sales over the last two years has a dark side in the form of “auto title loans” — the latest product in subprime financing which is raising concerns of a new bubble.
These auto title loans stem from the biggest boom in subprime lending since the mortgage crisis. But this time the automobile or light truck is at the center of the brewing potential crisis. The market for loans that consumers seek out to buy used cars is surging.
The new boom is leading borrowers into taking out risky lines of credit known as title loans on those automobiles, much like Americans did with the equity in their homes before the housing meltdown, according to a report by The New York Times.
More than 1.1 million households in the United States used auto title loans in 2013, according to a survey by the Federal Deposit Insurance Corporation — the first time the FDIC has included the loans in its survey. And that was a year ago.
These title loans are becoming more prevalent even as regulators in several states crack down on payday loans, another form of short-term lending with high fees, translating into effective triple-digit interest rates
Title loans, also known as motor-vehicle equity lines of credit or title pawns, are having devastating consequences for borrowers, forcing them to lose their vehicles and sending them into further debt.
A review by The Times of more than three dozen loans found that the effective interest rates ranged from nearly 80 percent to more than 500 percent, after factoring in various fees
“While some loans come with terms of 30 days, many borrowers, unable to pay the full loan and interest payments, say that they are forced to renew the loans at the end of each month, incurring a new round of fees,” the Times article states.