The problem with car title loans is NOT that people lose their cars.
According to three researchers led by Vanderbilt’s Paige Marta Skiba, the standard swipe at car title loans is a toothless claim that the deal leads to people losing their cars and then their jobs because they have no means. transportation to get to work.
“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 frequently lose their vehicles are wrong.”
Title loans are small, short-term, high-cost loans secured by a vehicle that the borrower usually owns. These loans, as well as payday loans, are used by many people excluded from the traditional banking system. The most common term for title loans is one month and the interest rate is usually around 300%, when expressed as an annual percentage.
If the borrower defaults on the loan, the lender can repossess the vehicle from the borrower.
Skiba, Ph.D. in Vanderbilt Economics. student Kathryn Fritzdixon and Jim Hawkins, assistant professor of law at the University of Houston Law Center, surveyed 400 title lending clients in three states (Georgia, Idaho and Texas) in partnership with a title lending company in November and December 2012. The three states have distinct approaches to securities lending regulation, but enough similarities to allow meaningful comparisons.
their study, Dude, where’s my car title? : The Law, Behavior and Economics of Securities 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.
The study showed that less than 10% of vehicles involved in title loans ended up being repossessed. Additionally, less than 15% of borrowers said they had no other way to get to work if their car was repossessed.
“While not insignificant, this small percentage suggests that the dire consequences the critics predict are unlikely to occur for the vast majority of securities borrowers,” Skiba said. “Rough calculations would put the percentage of securities borrowers who lose their jobs as a result of securities lending at 1.5%.”
Regulators could be of some help in titling loan consumers, Skiba said. Research shows that most title loan customers are overly optimistic that they will repay their loans on time, which means the loan ends up costing them much more than they realize when they pay it back. receive for the first time.
“Policymakers should require securities lending companies to publish information about how people actually use securities lending: information about how many times people renew their loan, the total amount of those renewals, the number and amount of late fees and other charges people pay and the likelihood of default on the loan,” the study read. [lquote]”Research has shown in real-world markets that disclosure rules can be used to inform people about how others are using loans, which can change their expectations about their own use of the product.”[/lquote]