About Payday & Auto Title Loans
Payday and auto title loans are exorbitantly priced loans offered to individuals with little consideration of their ability to repay the loans.
Payday loans in Texas:
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Average 500% APR or more
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Are secured by access to a borrower’s bank account via a post-dated check or electronic ACH (Automated Clearing House) authorization
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Have initial terms that are typically 14 to 180 days
Most borrowers cannot pay back the loans in full during the scheduled loan term and have to refinance, piling on additional hefty fees.
Auto title loans in Texas:
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Average 200% to 400% APR
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Are secured by a car title from a car that is paid in full
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The amount loaned is based on the value of the car
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Have initial terms of 30 to 180 days
Most borrowers cannot pay back the loans in full during the scheduled loan term and have to refinance, piling on additional hefty fees.
Refinancing means that the borrower pays a high fee to replace the existing loan with a new loan, including a new loan term, payment amount, and interest rate. On average, borrowers who refinance pay between $1,200 to over $3,000 to repay a $500 loan, creating a costly debt trap. Over 40% of loans made in 2019—nearly half of the Texas payday and auto title lending market—were refinances.
Though marketed as short-term loans, payday and auto title loan borrowers are often in debt at these usurious rates for one year or more.
How are interest rates of 200% to over 500% legal in Texas?
Usury protections in the Texas Constitution prohibit lenders from charging more than 10% interest unless the Texas Legislature specifically authorizes a higher rate. The rates in the Texas market should not be legal, but payday and auto title businesses have found a way around the constitutional usury protections by exploiting a legal loophole:
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They register as Credit Services Organizations and may be licensed as a Credit Access Business (CAB) under the Credit Services Organizations (CSO) Act.
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They broker loans between the borrower and a third-party lender and charge borrowers high fees for arranging and guaranteeing these loans.
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The third-party lender charges interest at or below 10% to avoid licensing under Texas law. CSO or CAB fees are completely unregulated and result in APRs over 500%.
Forty-six Texas municipalities are leading the charge to implement reasonable market standards that address the cycle of debt.
These cities have adopted ordinances that ensure that payday and auto title loans are structured for borrower success and repayment by breaking the cycle of ongoing refinances. Under the model ordinance, loans must be paid back in four payments. Additionally, these city ordinances require each payment to reduce the loan principal by 25% while also limiting the size of the loans based on the borrower’s income. The ordinances create a pathway to success rather than an unending cycle of unaffordable debt.
How do payday and auto title businesses impact local economies?
Inflated fees on payday and auto title loans undermine local economies. These loans drain local nonprofit and faith-based charitable assistance, as these organizations often help bail people out of payday and auto title loans. Money spent getting out of these loans is money not spent in the community on valuable goods and services. Bankruptcies, forced bank account closures, and unpaid bills caused by outrageous payday and auto title loan fees further drain local economies.