Regulating Title Loans Blindfolded

I started thinking about title loans several years ago, and one of the arguments that you see over and over is that we need to prohibit title lending because it causes a lot of people to lose their car and their only way to work.  Title loans are short-term, high-cost, small-dollar loans that are secured by a vehicle that the borrower usually owns outright.  They are often used by people who are already in a financial bind, so academics, policymakers, and consumer advocates are concerned about the distress caused by borrowers losing their way to work.

One time I asked a consumer advocate what evidence we had of this phenomenon, and I was surprised that we had none.  Despite its preeminence in the discussion, no one had measured how many people were actually losing their means of getting to work.  Policymakers relying on this justification were regulating blindfolded, so I began to work on the issue.

In a paper a few years ago, I tried to find out how often people are losing their cars.  It is less than you’d think. Take Texas, for instance. After three quarters in 2012, 7.37% of customers using single payment title loans had experienced repossessions.  There were 19,144 repossessions for the 259,691 customers with whom companies worked.  The report is available online.  Other states that track repossessions report similar numbers. 

The figure is not perfect.  It does not account for borrowers who redeemed their cars (i.e., got them back), so the percentage might overstate the number of people losing their cars.  But, it also does not account for the fact customers might change lenders, which would increase the repossession per
customer rate.  Overall, I suspect it is a decent approximation.

But, that still leaves the other part of the question – how many of the people losing their cars are losing their only way to get to work.  In a new paper, Kathryn Fritzdixon, Paige Skiba, and I surveyed over 400 title lending customers and asked about what would happen if they lost the car that was the collateral for their title loans.  Here is what they said:

	Percentage
Do not work outside the home	12.16%
Use public transportation	14.14%
Use another vehicle I own	40.20%
Walk to work	8.93%
Get rides from friends/family	17.37%
Buy a new car	8.68%
No other way to work	14.64%
N	403

If 10% of customers have their car repossessed, and 15% only have one way to work, then roughly 1.5% of people using title loans lose their only way to work because of the product.  To get to this number, we have to assume that the people we surveyed are representative of all borrowers and that the number of people who have other ways of getting to work are distributed equally among those experiencing repossession and those not.  But, for me, these figures raise the issue of whether the standard justification for banning title lending is sound.  (Of course, there may be others.)

 

Comments

[Scott Pryor]

Is there data on the average rates of interest on title loans?

[Jim Hawkins]

There is some variation. Tennessee's state report is probably the best, and it states that in 2009, 53% of companies charged 22% a month, the maximum rate allowed by law, while the other 47% of companies charged between 10% and 21% a month, which means the rates charged were around 120% to 304% annually.