Sometimes people desperately need to pick up some quick money, and wind up with lenders who require them to sign over a security interest for their vehicle. These are sometimes a short term loan with a balloon payment, along with an exorbitant interest rate.

The Consumer Financial Protection Bureau (CFPB) recently issued a report finding that 20% of borrowers who take out a single-payment auto title loan have their vehicle seized by their lender for failing to repay their debt. Over 80% of these loans are renewed when they balloon because borrowers cannot afford to repay them with a single payment. More than 67% of auto title loan business comes from borrowers who wind up taking out seven or more consecutive loans and are stuck in debt for most of the year.

This report discusses how the single-payment auto title loan market works and on borrower behavior in this market. It follows another report on online payday loans which found that borrowers get hit with steep bank penalties and risk losing their checking account due to repeated attempts by their lender to debit payments. With auto title loans, consumers risk their car or truck and a resulting loss of mobility, or becoming swamped in a cycle of debt. The CFPB is considering proposals to put an end to payday debt traps by requiring lenders to take steps to determine whether borrowers can repay their loan and still meet other financial obligations.

My experience is that these lenders often are more interested in the usurious interest they can charge, then in actually repossessing the vehicle. A vehicle that is worth less than $2,000 or so usually does not justify the time and administrative expense of hiring a repossessor, wrecker if necessary to haul it, and an auctioneer, but that won’t stop them from lending a person $5,000 against it, and threatening to repossess if the payment isn’t made. When these loans exceed the value of the vehicle, they can often be “crammed down” to market value in a chapter 13 (when appropriate), or “redeemed” at fair market value in a chapter 7 bankruptcy.