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How Do Car Title Loans Work?

Car title loans work by putting your car up as collateral for around 25-50% of its actual value in exchange for a short-term loan.

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If your bank account isn’t looking so great and you have bad credit, you may have considered a car title loan as a quick way to get cash. While they may only be relatively small amounts of money, car title loans can be risky if you don’t have a solid grip on your finances.

This article will look at what car title loans are, how they work, and weigh the benefits and risks of getting one. To help consumers make the best financing decisions, our research team has also combed the industry to identify the best auto loan companies.

What Is A Car Title Loan?

A car title loan is a short-term secured loan where the amount you borrow depends on the value of your car. You borrow up to a specific amount or percentage of your vehicle’s value in exchange for your car’s title. Typically, car title loans are only given to those who have paid off their vehicle in its entirety. However, there are some lenders who will allow you to take out a loan when your car is nearly paid off.

There are two different types of car title loans:

  • Single Payment Loans: the borrower has to pay the full amount of the title loan plus the interest rate fee in a month or less.
  • Installment Loans: these car title loans can be paid back with interest over three or six months, depending on the lender.

Even though “car” is in the name, car title loans may be available for motorcycles, boats, and recreational vehicles like ATVs.

How Do Car Title Loans Work?

Unlike payday loans, which serve a similar purpose, car title loans work by putting your vehicle up as collateral. These secured loans are usually for small amounts of money and often need to be repaid in a short amount of time.

For example, imagine you have a car worth $10,000 dollars and need $2,000 for a sudden emergency. Title Loans allow you to borrow against your car, similar to taking out a mortgage for a home, so you can get that money quickly. Until you pay back the loan in full, including interest, the lender reserves the right to reposess your vehicle.

The Pew Charitable Trusts reports the average car title loan amount is $1,000, but this can range anywhere from $100 to $10,000. Because they’re short-term loans – with due dates commonly within 15 to 30 days – borrowers are usually expected to repay the balance in one lump sum.

How to Get Your Car Title After Paying Off A Loan

If you pay off a car title loan, you notify your local DMV and submit the required paperwork they provide for your state. After this point, your car’s title will be considered “free and clear” meaning you have full ownership of the vehicle.

Car Title Loan Application Process

The process for getting a car title loan is relatively simple:

  1. First, you fill out an application. You then show the car, the title, and a copy of your photo ID to the lender. You may be asked for a duplicate set of car keys.
  2. If the loan is approved, the car title lender exchanges the money and keeps the vehicle title. 
  3. When it is time for repayment, you pay the lender a monthly fee in addition to the borrowed amount.

The monthly fee for a vehicle title loan tends to be very high interest. According to the Federal Trade Commission, the average fee is 25%, which is an annual percentage rate (APR) of about 300%. This can be costly.

For example, let’s say you take out a car title loan for $500 with a finance fee of 25%. Twenty-five percent of $500 is $125, which gets added to the final amount due. So, at the time of repayment, you would owe $625.

Where To Apply For Car Title Loans

Borrowers can obtain car title loans online and in person. Notably absent from the application process for auto title loans is a credit check. That’s because failure to pay the loan means the lender can repossess your vehicle.

To approve you for a car title loan, most lenders will require a clear title. This means you’ve paid the vehicle off. However, some lenders may just need you to prove you have equity in the vehicle.

Why Are Car Title Loans Risky?

With a car title loan, you risk not only losing your car, but also getting locked into a cycle of debt. If you’re unable to repay the loan, the lender may let you do a “rollover.” A rollover is when a lender allows you to keep the loan money for another 30 days but ensures you will have to pay another monthly fee.

Rollovers are fairly common. In June 2019, the Consumer Finance Protection Bureau (CFPB) polled consumers who had secured auto title loans in the previous six months. It found 83% of respondents still owed money on their loans. 

The CFPB also reported roughly 20% of borrowers experience repossession if their loans aren’t paid back in full. According to Forbes, car title lenders make most of their revenue by letting borrowers take out new loans to pay off existing ones. This cycle of small loans becoming long-term debt also ensures continued business.  

What Are the Pros & Cons of Car Title Loans?

If you’re thinking about taking out a car title loan to handle unexpected expenses, you should consider the pros and cons: 

Car Title Loan Pros Car Title Loan Cons
No credit check means approval for borrowers
with bad credit
Monthly payments can turn into long-term debt
You have access to quick cash Your car could be repossessed
Late payments don’t impact your credit score Interest rates are high compared to other options

Car title loans can be attractive to borrowers with poor credit since most title lenders don’t perform credit checks. Additionally, your credit score won’t take a hit if you’re late on a payment. That said, getting quick access to cash with a car title loan rarely justifies the high interest rates and potential to lose a valuable asset.  

Alternatives to Car Title Loans 

Since the data behind car title loans is less than stellar, going another route is probably a smarter financial move. Here are some alternatives to putting up your car’s title:

  • Paycheck advance: If you’re in good standing with your employer, you may be able to get some of your pay early.
  • Friends and family: If you want to avoid a financial institution altogether, try talking with friends and family to see if you can set up a loan agreement with a payment plan.
  • Credit cards: Credit cards have set limits, and you’ll be charged interest if you don’t pay your balance off by the end of the billing period. Even so, credit cards have lower interest rates than car title loans.
  • Personal loans: These installment loans can be used toward almost any financial need and are available through banks, credit unions, and online lenders. They often have repayment terms of one to five years, and their interest rates are far lower than those of auto title loans.

Car Title Loans Review: Conclusion

Car title loans are very risky when compared to other loan options and can put you in a cycle of debt. We recommend that you shop around and compare options before choosing a car title loan.

Best Recommendations for Auto Loans

Regardless of whether you’re financing a car or using one as collateral, it’s important to compare options to make sure you’re getting the best rate. It’s wise to always read the terms of each loan and check for potential penalties. You can also take advantage of the online prequalification many financial institutions offer.

How Car Title Loans Work: FAQ

Below are some frequently asked questions about how car title loans work:

How much title loan can I get for my car?

According to the CFPB, the average car title loan is around $1,000. The usual loan limit is between 25% and 50% of the car’s value.

How easy is it to get a car title loan?

Getting a car title loan is fairly straightforward. The borrower fills out an application and lets the lender inspect the vehicle and its title. If the ownership of the vehicle is clear and the lender approves the application, the borrower hands the title over in exchange for a loan.

How do car title loans work?

Car title loans are small, short-term loans subject to high interest rates. With a car title loan, a lender holds on to your vehicle’s title as collateral. If you don’t repay the loan, the lender has the right to repossess the vehicle.

Do car title loans affect your credit?

Most car title loans do not require a credit check. That means a lender likely won’t report payments to credit bureaus since it can repossess the vehicle to settle the debt.