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Pay $2,140 to borrow $950? That's how car title loans work

Desperate consumers who are out of borrowing options are using their automobiles as collateral and paying $3.5 billion a year in interest for the so-called "title loans," the Center for Responsible Lending said in a report issued this week.  The average loan is $950, and borrowers take on average 10 months to repay the loans, meaning they'll spend $2,140 to borrow the money, the report said.

The size of the title loan market is roughly equal to the size of the payday loan market, which has received far more attention from regulators, according to the report. Title loans are only allowed in roughly half of U.S. states, making the size of the market even more surprising, said report author Uriah King.

"The market size is comparable because of the sheer size of the title loans," said King, adding that title loans are, on average, roughly three times larger than payday loans: Some 7,730 lenders make $1.6 billion in title loans annually, the group estimates.

The consumer group estimated the size of the market, and drew other conclusions about title loans, based on loan-level data from a lender made public as the result a lawsuit filed against the industry.

Aggressive late-night television ads pitch title loans as a solution for consumers who find themselves needing short-term loans but can't use standard options, such as credit cards. Generally, consumers can borrow up to 26 percent of the assessed value of their car, which they must own free and clear. Loans are often issued at 25 percent interest per month: In other words, it costs $250 to borrow $1,000 for a month.  The risk, of course, is that borrowers can lose their cars to repossession if they default. Borrowers must often leave a copy of their car key with the lender to make repossession easy.

Another unique and concerning characteristic of title loans: Issuers often don't make any assessment of a borrower's ability to repay the loan.  In fact, some brag in advertisements that they don't run credit checks, and borrowers don't need to prove employment to obtain the loans. 

To lenders, there is almost no risk in the loans, because they are "completely collateralized," King said.  Borrowers are highly motivated to repay the loan because their automobiles are usually their most valuable piece of property – most borrowers are renters -- and cars are needed for transportation to work. 

Repossession, which costs an additional $300 to $400 in fees, means outstanding loans nearly always are repaid.

"This is a loan of virtually no risk," King said. "I heard one branch manager say these are 'all blue sky' loans, because as soon as one interest payment is made, the rest is all (profit)."

Title loans, like payday loans, have long fallen into a gray area for regulators because they are non-traditional, short-term lending products. Until the creation of the Consumer Financial Protection Bureau (CFPB), lenders did not have to answer to federal lending regulators and were governed only by state laws. When the CFPB was created, its regulatory powers were extended to such short-term loan instruments.

Payday lenders argue that annual percentage rates and other standard loan measures are unfairly applied to their product because consumers often borrow money for only a few weeks.  So expressing a $20 fee for a two-week $200 loan as having a 2000 percent APR, for example, doesn't fairly represent the true cost of the lending product, they say.

However, the Pew Center for the States reported recently that the average payday borrower takes five months to repay a loan, arguing that annual percentage interest rates are indeed relevant to assessing those loans. 

There is no such debate in title loans, however, King argues, because of the size of the loans.

"There's no way this loan is getting repaid in a month, it's just not going to happen," he said. "A lot of middle-class families would struggle to pay off a $1,200 loan (average interest plus principal) in a month." Instead, the loans typically are renewed each month for an average of 10 months, he said.

Calls and e-mails to the two top title loan issuers, Title Max and Loan Max, went unanswered. On its website, Title Max says it has more than 1,000 title lending stores across 12 states and provides car title loans to more than 2,000 people daily,

A chat operator for TitleMax said she would pass on NBC News' inquiry to officials at the company.

"I have done all that I can do. This is the sales chat, like I have stated before. Your best option would be to contact customer care all I can do is pass this information to them," said the operator, who identified herself as "Tiffany."  Calls to customer service went unanswered.

The title loan industry set up a trade group and political action committee, the American Association of Responsible Auto Lenders, several years ago to champion its product. The group's website is no longer functional, and calls to former board members went unanswered.  It did submit a public comment in 2011 to the Consumer Financial Protection Bureau, arguing against that agency's intentions to regulate the industry. A copy of the comment letter was provided to NBC News by the Center for Responsible Lending.

In the letter, the group argues that title loans are a good alternative for consumers who can't borrow money from other sources.

"Our customers prefer auto title loans to alternatives such as overdraft fees, bounced check fees or late fees that may also have negative credit consequences," said the association.

The letter claimed that 1 million consumers obtain title loans worth $6 billion annually, but also said the industry was substantially smaller than the payday loan business, which it pegged at $38 billion annually. The size of the payday loan industry is disputed because of how consumer groups and industry groups count recurring loans.

The association said the average title loan was under $1,000, and was typically repaid in six months. 

"Auto title loans are often the only legitimate option that individual and small business owners have, since in many cases their low credit scores would exclude  them from doing business with commercial banks and credit unions even if these institutions were willing to lend in the amounts typically sought by auto title borrowers," the association wrote.

It also argued that only 6 to 8 percent of cars used as title loan collateral are repossessed. The Center for Responsible Lending reported that nearly 17 percent of title loan customers face repossession fees. King said it has no way of knowing how many of those cars are ultimately repossessed.

"I'm actually surprised that repossessions aren't higher," King said.

The Center for Responsible Lending argues that title loan firms should be required to assess borrowers’ ability to repay before issuing loans, and that interest rates be capped at 36 percent.

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