The High Hidden Costs of Auto-Title Loans in Illinois

Inside Subprime: July 25, 2018

By Lindsay Frankel

Illinois is the state where the old Route 66 – that American icon of the freedom of the open road – had its start. But if you’re hoping to use your car as collateral to get free from unexpected bills, you could be facing a rocky financial path.

As outlined in a recent report by Natalie Moore for WBEZ, auto-title loans in Illinois have led to 64,000 instances where a car was repossessed, the loan was written off, or at least one payment was in default.

How do auto-title loans work? Essentially, they’re similar to payday loans, in which a borrower takes out a short-term, high-interest loan by leaving a blank check (or in some cases, authorization to withdraw funds from a checking account) with a storefront loan operation. (These are often identifiable by neon signs promising “Fast Cash” with “No Credit.”) When the loan comes due, the lender deposits the check, including all fees and interest. (You can learn more about predatory lending practices in Illinois here.)

However, with the auto-title loan, the borrower puts up a vehicle as collateral by leaving the title to the car or truck with the lender. According to the Consumer Financial Protection Bureau (CFPB), the typical auto-title loan is for $700 and the annual percentage rate (APR) is 300 percent – far higher than traditional loans.

But if you’re short on cash and don’t have access to a line of credit through a traditional institution, such as a bank or credit union, using your car for quick cash can be tempting. That’s what happened to Paul Gillespie in Moore’s story. After his wife’s death and a health crisis that took him away from his job, he turned to an auto-title lender for a $2,000 loan. By the time he paid it back, it cost him more than $4,000.

The CFPB notes that one in five auto-title borrowers lose their vehicles because they can’t repay the loan on time. If you depend on your vehicle to get to work, this puts you in even worse financial shape. Even those who make payments find it hard to get out of the “debt spiral.” According to the CFPB report, “More than two-thirds 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.”

Auto-title loans have been legal in Illinois since 2009, and according to Moore’s report, there are 57 companies – several with multiple locations – doing business with auto-title loans in the state. The maximum loan amount is $4,000, with interest running as high as 360 percent.

Anti-poverty advocates in Illinois are taking aim at these loans. The Illinois Asset Building Group, a project of the nonprofit Heartland Alliance, has campaigned for a 36 percent interest cap on auto-title loans. According to the Heartland Alliance, 28 other states have either banned auto-title loans outright or capped interest rates at 36 percent.

The Fair Lending Act, introduced by Illinois State Representative Christian Mitchell (D-Chicago) in the Illinois General Assembly earlier this year, wasn’t able to garner enough bipartisan support to make it out of committee. Mitchell told WBEZ that he intends to reintroduce the bill early next year. (How does Chicago regulate predatory payday and title loans? Check out our Chicago Subprime Report here.)

Industry lobbyists, on the other hand, as reported by Moore, maintain that these loans are crucial for individuals who can’t access emergency cash from any other source. But as stories like Gillespie’s continue to hit the media, the impact of auto-title loans on low-income residents of Illinois becomes clearer.

Jody Blaylock, a policy analyst on financial issues with the Heartland Alliance who has been collecting stories about auto-title loan debt traps from consumers, told WBEZ “Establishing a 36 percent interest rate cap is critical if we want to build equity across the state and build opportunity for everyone.”

Learn more about the dangers of payday loans in the United States in all of our Subprime Reports.

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