You might not know what a "car title loan" is, and you might not have much sympathy for anyone who agreed to its typical 300 percent annual interest rate. 

But you should know about these credit carnivores if you have an 18- to 34-year-old son or daughter or know anyone who is short on savings or struggling to make ends meet.

Let's talk about your kids first. Consumers born between 1982 and 2000—the Millennials—are especially hot prospects for car title loans, according to a study released yesterday by the Consumer Financial Protection Bureau. That's because they often have considerable student debt and not enough income, since they're still establishing themselves in their careers.

Indeed, 34 percent of car title loan customers are millennials, according to a Pew Charitable Trusts study (PDF) published last year. It's easy to see how these loans might be tempting to young people. You drive your car to a storefront lender and give him your vehicle title and a copy of your keys. You keep the car and drive off with hundreds in cash, which you have a month to repay.

But you don't have to be poor or strapped to be tempted by these stopgap loans. The Pew study also found half of car title loan borrowers are homeowners, and 25 percent earn $50,000 to $100,000 or more per year.

"Those are the badges of the middle class," says Nick Bourke, the director of Pew's Small Dollar Loans Project. 

The Title Loan Trap

Norma Garcia, a senior attorney and manager of financial services for Consumers Union, the policy and advocacy arm of Consumer Reports, says car title loans are a potential debt trap for every kind of consumer who resides in the 25 states where this type of credit is available. But they can be catastrophic for low-income borrowers, putting them in a debt spiral.

In many cases, borrowers use car title loans to cover regular expenses, such as rent and utilities, and agree to such high-priced credit because they expect to be able to easily get back on track. But the tighter someone's budget, the harder that might be to accomplish, especially in months when income contracts, whether because that person worked fewer hours or got four instead of five paychecks due to quirks of the calendar.

In fact, the CFPB found that 80 percent of the 3.5 million loans it studied were not repaid in a month. Rather, borrowers had to take out more loans to repay their initial debt, many borrowing six or more times. 

One in five car title loans result in repossession of the vehicle, the CFPB found. That's why the lender wants your keys. It makes seizing your car more convenient for the repo man.

It gets worse. Pew found that the average $1,000 title loan costs $1,200 in finance charges alone. The Center for Responsible Lending, which has also studied title loans, found even more costly examples. One Virginia borrower made $4,500 in payments on a $1,600 loan–and still had his truck repossessed. 

How Not to Get Stuck in the First Place

  • Build and maintain an emergency fund. To smooth out those monthly income fluctuations, the JPMorgan Chase Institute estimates that median-income families should have $1,800 in liquid savings
  • The Institute also recommends bankrolling, rather than spending, those extra paychecks.
  • Pew says car title loan borrowers themselves had alternatives, including cutting back expenditures, borrowing from friends or family, getting a loan from their credit union or bank, and delaying payment of some bills until the money was in hand.

The CFPB is expected to propose regulations this year that will set standards for title and other small-dollar loans to better protect consumers.

Consumer Reports, which worked with other consumer groups in 2008 to pass the Military Lending Act and cap title loan and other non-bank interest rates at 36 percent for military personnel, supports the CFPB efforts.

"Title loan borrowers generally don't have to show ability to repay. We believe that should be a factor of sound underwriting, and that it should be based on the consumer's income, living expenses and other financial obligations," says Pamela Banks, policy counsel at Consumers Union.