It is a tempting offer: Convert that beaten-up car in the driveway into hard cash with a simple loan.
But car title loans, which allow owners to borrow money against their cars, are having devastating financial consequences for a growing number of Americans who don’t realize how much they truly cost. As the loans proliferate, regulators are beginning to crack down on them.
The Federal Trade Commission took aim at two car title lenders on suspicions that they misled borrowers by failing to accurately disclose the terms and costs of the loans. On Friday, the agency announced that it had reached a settlement with the two lenders, First American Title Lending and Finance Select, which are based in Georgia. The agreement requires the companies to overhaul how they advertise and promote their loans.
“This type of loan is risky for consumers because if they fail to pay, they could lose their car – an asset many of them can’t live without,” said Jessica Rich, director of the agency’s Bureau of Consumer Protection.
Neither company returned calls for comment.
The move — the first time that the agency has taken action against title lenders — points to a growing concern among state and federal authorities that the loans are plunging some of the most vulnerable borrowers further into debt, propelling them into bankruptcy and, in many cases, costing them their cars.
The loans allow borrowers to hand over car titles as collateral for cash — typically a percentage of a car’s resale value. If the borrowers cannot pay back these loans, which come with annual interest rates as high as 300 percent and last from as little as 30 days to two years, lenders can repossess their cars. The perils of title lending were the subject of a front-page article in The New York Times last month.
Across the country, this business is booming. More than 1.1 million households in the United States reported taking out an auto title loan in 2013, according to the Federal Deposit Insurance Corporation. In Virginia alone, title lenders made 177,775 loans in 2013, a roughly 612 percent surge since 2010.
Behind the boom is a stark reality for many Americans: Their cars are their only possessions of value, especially after the 2008 financial crisis wiped out the equity in their homes. Short of cash to cover expenses like doctors’ bills or electricity payments, an increasing number of borrowers are turning to their cars for a short-term loan, according to interviews with legal aid lawyers in six states.
Just one loan, meant as a short-term fix, has led to financial ruin for borrowers already on the financial margins. With the steep interest rates, the loans can cause borrowers to lose the one asset that they owned free and clear. One in every six title-loan borrowers lost their cars to repossession, according to an analysis of 561 title loans by the Center for Responsible Lending, a nonprofit group in Durham, N.C.
Such repossessions have cost people their businesses, imperiled their marriages and, in an extreme example, left a title-loan borrower unable to walk after a gunfight broke out. Harry Clay, a veteran who lives in New Mexico, was paralyzed when a repo agent, dispatched to seize Mr. Clay’s Dodge Ram, shot him three times, court documents show.
Although there is little nationwide data on title-loan borrowers, recent academic studies offer a portrait of who takes out title loans, and why.
Analyzing more than 400 borrowers in three states, professors at Vanderbilt University and the University of Houston Law Center found that roughly 20 percent of customers used the proceeds of title loans to cover mortgage or rent payments.
Faced with steadily mounting debt and a spate of new bills each month, many borrowers say that advertisements from the title companies persuaded them that such loans offered a way out. Some advertisements feature models throwing wads of cash into the air. Others display cartoon characters whose money nightmares are banished by title loans.
In its action, the F.T.C. is zeroing in on such aggressive advertising, which blankets radio stations and late-night television shows along with billboards throughout urban, predominantly low-income communities.
The F.T.C. found that advertisements by First American Title Lending and Finance Select went too far. Both companies, the agency discovered, pitched the loans with zero percent interest rates but failed to disclose that the interest rates on the loans jumped after an introductory period. In its advertisements, First American Title Lending did not tell customers that to receive a zero percent loan, borrowers had to first meet a range of conditions. Unless borrowers paid their loans with a money order or certified check, for example, the offer was void.
“Drive away with the help you need,” First American Title Lending says on its website.
Finance Select, the F.T.C. said, offered a zero percent interest rate during an introductory period but did not initially tell borrowers just how much they would owe after 30 days.
As part of a settlement with the F.T.C., the companies agreed to improve their disclosures about loan terms. The agency did not fine the companies as part of the settlement.Still, if either company fails to abide by the settlement, the agency could assess penalties of up to $16,000 for each violation.
The industry falls under a patchwork of state regulations that are rife with loopholes. In 21 states, car title lending is expressly permitted, with title lenders charging interest of up to 300 percent a year. In most other states, lenders can make loans with cars as collateral, but at lower interest rates.
But even in states that restrict title loans, some title lenders have found ways around the laws. In California, for example, the interest rates and fees that lenders can charge on loans for $2,500 or less are restricted, so some title lenders extend loans for just more than that amount.