“Because title loans are largely unregulated in Illinois, lenders have increased loan terms to an average of over 18 months while still charging interest rates over 200 percent APR,” said Spencer Cowan, Senior Vice President of Research at Woodstock Institute. “Multi-year, triple-digit loans are incredibly expensive and, with the borrower’s car title securing the loan, there is very little incentive for the lender to consider the borrower’s ability to repay the loan with his or her existing income. Borrowers are taking out loans they cannot afford, being trapped in a cycle of debt, with a very high risk of default.”
The report, “No Right Turn: Illinois’ Auto Title Loan Industry and its Impact on Consumers,” uses data from two reports on the consumer lending industry released by the Illinois Department of Financial and Professional Regulations (IDFPR) and loan-level data from court records of collection cases filed in Cook County. The report finds that:
· The vast majority of title loans in Illinois are taken out by low-income people. Nearly three quarters of all title loan borrowers in Illinois have incomes of less than $30,000, and over 90 percent have incomes of less than $50,000.
· The number of title loans issued in Illinois has steadily increased between 2009 and 2013. In 2009, Illinois consumers borrowed an estimated 73,116 title loans. By 2013, that number had increased to 100,698 title loans.
· The annual percentage rate (APR) charged by lenders has decreased slightly, but the average term, principal amount, and total fees have increased significantly. While the average APR decreased from 285 percent to 234 percent, title loans in Illinois now have an average term of 18.6 months with principal amounts of $1,089 and average fees of over $3,000.
· Illinois title lenders made loans to consumers in other states where title loans are illegal. Illinois court records show that Illinois lenders made online title loans to consumers who live out of state, including states where title lending is illegal, and then sued the consumers in Illinois.
“Financially vulnerable families are turning to high-cost title loans to try to help make ends meet or cover the cost of an unexpected expense. Soon they find themselves in a cycle of debt that leaves them even more financially fragile,” said Lucy Mullany, Senior Project Manager for Financial Empowerment Policy at the Heartland Alliance and Coordinator of the Illinois Asset Building Group. “We need increased access to safe and affordable small dollar loans and strong consumer protections at the state and federal levels that ensure consumers aren’t forced to choose between making a title loan payment and covering regular monthly expenses such as food or rent.”
Woodstock Institute and IABG recommend that:
· The Consumer Financial Protection Bureau (CFPB) should issue strong rules covering high-cost, small-dollar loans, including title loans, to ensure loans are safe and affordable.
· Congress should pass legislation instituting a 36 percent cap for all consumer loan products, including title loans.
· The Illinois legislature should strengthen the Consumer Installment Loan Act to require stronger ability-to-repay standards, maximum loan terms, and a rate cap of 36 percent APR.
· The Illinois Department of Financial and Professional Regulation (IDFPR) should publicly release loan-level data from the state database to allow for a more detailed analysis and monitoring of small-dollar lending in Illinois.
· Financial Institutions should create and market affordable, small-dollar loans with ability-to-repay standards as alternatives to high-cost, predatory products.