Auto Title Loan

An auto title loan is a closed-end or open-end consumer loan secured by a lien on a motor vehicle the borrower already owns, in which the lender takes the certificate of title as security and the borrower keeps possession and use of the vehicle. The Consumer Financial Protection Bureau uses vehicle title and auto title interchangeably: its 2016 research report is titled "Single-Payment Vehicle Title Lending" and its own description of that report calls the product "single-payment auto title loans". Federal regulation describes the security rather than naming the product: 32 CFR 232.8(f) speaks of a creditor that "uses the title of a vehicle as security for the obligation involving the consumer credit."

The negative half of that description is what makes it one thing rather than a variation on an auto loan. A purchase-money vehicle loan advances money to buy the car and takes a lien on the car being bought. A title loan advances money against a car the borrower already has, for any purpose at all. Published material on auto loans covers the purchase-money instrument; this page covers the loan that is defined by not being one.

The sharpest fact about this product is that two federal regimes, written years apart for different reasons, draw the identical line, and a title loan is what falls on the far side of both.

The Military Lending Act's implementing regulation defines "consumer credit" and then excludes, at 32 CFR 232.3(f)(2)(ii), "Any credit transaction that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased." The CFPB's payday rule states its own exclusion at 12 CFR 1041.3(d)(1) for "Credit extended for the sole and express purpose of financing a consumer's initial purchase of a good when the credit is secured by the property being purchased," and the rule's official commentary gives a car as its first example. So a loan used to buy a car is outside both. A loan taken against a car already owned is inside both, and that is the entire regulatory identity of this product: it is the vehicle-secured loan that neither carve-out reaches.

For one group of borrowers the consequence is not a rate cap but a prohibition. 32 CFR 232.8 opens by stating that "Title 10 U.S.C. 987 makes it unlawful for any creditor to extend consumer credit to a covered borrower with respect to which" a list of things is true. Paragraph (f) is one of them: the creditor "uses the title of a vehicle as security for the obligation involving the consumer credit, provided however, that for the purposes of this paragraph, the term 'creditor' does not include a person that is chartered or licensed under Federal or State law as a bank, savings association, or credit union." A covered borrower is an active-duty servicemember or a dependent. The separate 36 percent military annual percentage rate ceiling at 32 CFR 232.4(b) is a limit on price; this is a bar on the structure, and the exception is drawn around depository institutions rather than around loan terms.

The refinancing trap is written into the rule's own commentary. The payday rule's purchase-money exclusion is explained in a comment headed "'Sole purpose' test," which ends: "This exclusion does not apply to refinances of credit extended for the purchase of a good." A borrower who refinances an existing car loan with a non-purchase lender has moved from a transaction outside the rule to one that can be inside it, on the same car, without anything about the vehicle changing.

"Motor vehicle" is a defined term and it is narrower than the ordinary word. 12 CFR 1041.2(a)(15) provides that it "means any self-propelled vehicle primarily used for on-road transportation. The term does not include motor homes, recreational vehicles, golf carts, and motor scooters." A loan against the title to a recreational vehicle is not reached by that definition, which matters because the marketing does not distinguish.

What happens if the loan is not repaid is state law, and this page will not pretend otherwise. The lender's remedy is repossession, governed by article 9 of the Uniform Commercial Code as enacted in each state, with the sale proceeds applied to the costs of taking and selling the vehicle before the debt itself. Whether a notice is owed, whether the borrower may cure, and what may be collected afterward differ from state to state. Published material on repossession covers the seizure, and what is still owed after the sale is a deficiency balance, which has its own page.

The borrower brings a vehicle owned free of other liens, along with the certificate of title. The lender values the vehicle, lends a fraction of that value, records its lien against the title, and hands the vehicle back. Nothing about the borrower's income or the loan's purpose changes the security: the title is the collateral, and it stays with the lender until the loan is repaid.

A hypothetical showing which rules apply, using one car and two loans. Marcus buys a used truck for $14,000 with a loan from the dealer's finance company, secured by the truck he is buying. That loan is expressly intended to finance the purchase and is secured by the vehicle being purchased, so it falls inside the exclusion at 32 CFR 232.3(f)(2)(ii) and inside the exclusion at 12 CFR 1041.3(d)(1). Neither the Military Lending Act's ceiling nor the CFPB payday rule reaches it.

Three years later the truck is paid off and worth about $9,000. Marcus borrows $2,500 against the title from a storefront lender. That is $2,500 against $9,000 of collateral, roughly 28 percent of the vehicle's value, which is the design of the product rather than an accident of this example: the lender is protected by a wide margin of collateral value and does not need the loan to be affordable in order to be repaid. This second loan finances nothing that is being purchased, so neither exclusion applies. If Marcus were on active duty, 32 CFR 232.8(f) would make the second loan unlawful for the storefront lender to make at all, while leaving the first one untouched.

Everything about the truck is the same in both transactions. Only the direction of the money changed, and that is what moved the loan across two federal lines at once.

Pros

• Approval usually turns on the vehicle rather than on credit history, so it is available to borrowers a lender would otherwise decline.
• The borrower keeps possession and use of the vehicle for the term of the loan, which is what distinguishes it from pawning an item outright.
• Funding is fast, often the same day, because the underwriting is an appraisal rather than an income assessment.
• For a covered borrower under the Military Lending Act the non-bank version is prohibited outright, which is a real and enforceable protection rather than a disclosure.

Cons

• The collateral is usually the borrower's way of getting to work, so the failure mode takes the income that would have repaid the loan along with the car.
• The wide margin between the loan and the vehicle's value means the lender is well protected whether or not the borrower can afford the payments, which removes the lender's own incentive to test affordability.
• Repossession generally does not require going to court, and the rules on notice and on curing a default are set by each state rather than nationally.
• Selling the vehicle does not necessarily end the obligation. Costs of taking and selling it come out of the proceeds before the debt, so a shortfall can remain.
• Refinancing an ordinary car loan into one of these products forfeits the purchase-money carve-out that protected the original loan.