With the use of risky car title loans on the rise in Illinois, consumer advocates are calling for greater state and federal protections against "abusive auto title lending" that can trap borrowers in long-lasting debt cycles.
Title lending, in which a borrower's vehicle is used as collateral, provides small-dollar loans, but often comes with high interest rates and expensive fees. Title loan borrowers are paying triple-digit annual percentage rates (APRs) in Illinois, where there is no cap on title loan APRs or maximum terms.
"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, coordinator of the Illinois Asset Building Group and senior project manager for financial empowerment policy at the Heartland Alliance.
According to a new report from the Illinois Asset Building Group and the Woodstock Institute, the number of title loans issued in Illinois ticked up by over 37 percent between 2009 and 2013, from more than 73,000 to nearly 100,700.
Most of those title loan borrowers were low-income. Nearly 75 percent had annual incomes below $30,000 and 90 percent had incomes under $50,000.
Fairmount, Illinois resident Paul Gillespie, 49, took out a title loan earlier this year and has vowed to never do it again.
The father of two teenager girls struggled financially after his wife died of lung cancer last December. Gillespie said the stress he experienced after his wife's death caused him to have a heart attack in March, which put him out of work for about a month and left him drowning in more bills.
He had poor credit and was out of borrowing options when he took out a $2,000 title loan in April to help makes ends meet.
The loan's annual interest rate was 240 percent, which meant he accumulated about $15 in interest per day. His monthly payments were $450.
"I paid May, June, July, August. There's 1,800 bucks right there," he told Progress Illinois. "And it was all interest, is what it turns out."
After taking out the title loan, Gillespie was injured on the job in June. He is a welder at a farm equipment manufacturing company in Ogden, Illinois and lost the tip of his right pinky and use of his right ring finger in the accident.
Gillespie eventually received a workers' compensation settlement from the accident, which he used in part to pay off his remaining title loan balance of $2,400 in September.
In all, Gillespie paid about $4,200 to borrow $2,000. Gillespie said it could have cost him about $10,000 to pay off the loan had he continued with the original payment plan.
"I'll never do it again," he said of taking out a title loan. "I wouldn't recommend it to anybody unless they can make sure they can pay for it."
The annual interest rate of Gillespie's title loan was slightly above the average APR for such loans in Illinois, which reached 234 percent in 2013. That year, the average title loan in Illinois had a principal amount of about $1,000 and a term of 18.6 months. Title loan fees averaged over $3,000 in 2013, the research showed.
The report is based on the most current statewide data on lending trends from the Illinois Department of Financial and Professional Regulations, which oversees lenders in the state, as well as data from auto title loan collection cases filed in Cook County Circuit Court.
"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, the Woodstock Institute's senior vice president of research. "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."
In 2013, the title loan default rate in Illinois was about 27 percent, compared to 10 percent for small consumer loans, payday loans and payday installment loans, according to the research.
Several recommendations are outlined in the report to make title loans safer for consumers, including passage of federal legislation that would limit interest rates on title loans and all other consumer loan products to 36 percent.
At the state level, the groups want the Illinois legislature to "institute maximum term lengths; strengthen underwriting requirements to include assessment of a borrower's income and ability to repay the loan, as well as existing expenses and debt; and apply the rate cap of 36 percent to title loans."
"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," Mullany stressed.