- Car title loans work by using your car as collateral for short-term financing.
- Most vehicle title loans come with extremely high interest rates.
- Title loan lenders can reposess your car if you fail to repay your loan as agreed.
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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 providers and rates.
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. Also known as a title pawn, you borrow up to a specific amount or percentage of your vehicle’s value in exchange for your car’s title.
Typically, auto 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: Single payment title loans are short-term loans and borrowers typically have between 15 and 30 days to repay them, usually in one lump sum. If you don’t repay the balance by the due date, the balance will roll over to the next month and accrue additional interest.
- Installment loans: These car title loans can be paid back with interest over three or six monthly payments, depending on the lender. However, repayment policies – and the penalties for not doing so on time – are nearly identical to single payment loans.
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?
Car title loans are a type of loan that lets you borrow money against the value of your car. Unlike payday loans which are unsecured, loans against your car title are secured, using your vehicle as collateral. As a result, most lenders don’t need to perform a credit check as part of the process.
These loans are typically for a relatively small amount of money and typically need to paid back in a short amount of time.
How Much Can You Borrow With an Auto Title Loan?
Lenders will typically loan up to between 25% and 50% of the value of your vehicle in exchange for your title. The Pew Charitable Trusts reports the average auto title loan amount is $1,000, but this can range anywhere from $100 to $10,000.
How Much Interest Do You Pay On an Auto Title Loan?
Auto title loans tend to be high-interest loans. According to the Federal Trade Commission, the average fee is 25%, which is an annual percentage rate (APR) of about 300%. This can be very costly, even when borrowing a small amount of money.
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.
How Do You Get Your Car Title After Paying Off A Loan?
Once you pay off a car title loan, you can get your title back from the lender. To do this, you’ll need to notify your local DMV (or equivalent agency) and submit the required paperwork they provide for your state.
Once you do this, your car’s title will be considered “free and clear.” This means that you have full ownership of your vehicle and the lender no longer has any claim to the title.
Where To Find Car Title Loans
To get a car title loan, you’ll need to find a lender that specializes in payday alternative loans. The more traditional lenders that offer auto purchase and refinance loans typically don’t offer this type of financing.
These days, the most common way to apply for a vehicle title loan is to do so online. A simple web search should bring up plenty of options. Some may offer better rates than others, but you can expect that nearly all of your offers will come with a high interest rate.
Some companies do have local offices where you can apply in person. If you have specific questions about the loan, this can be a good opportunity to talk to a real person about the details.
How to Get a Car Title Loan
The title loan application process is usually straightforward and there are a few steps you’ll need to follow:
- Get the required documents: You’ll need a photo ID, proof of income, proof of insurance, and, of course, your car title to secure your loan. Gather these documents before applying to ensure a smooth process.
- Fill out your loan application: Lenders often have online applications that you can use, but you can also visit a physical location to fill out an application in person. This may be helpful if you have questions for the lender.
- Hand over your title: If the lender approves your loan, you’ll need to hand over your car title to get your cash. You may also need to give one set of keys to the lender in some cases. Many lenders offer same-day financing, meaning you can get quick cash right away.
Are Car Title Loans a Good Idea?
A vehicle title loan isn’t going to be your best financial option in most cases. They typically come with some of the highest interest rates allowed under federal law, making them a very expensive way to borrow money. You also risk losing your car if you can’t repay the funds on time.
Risks of Title Loans
If you’re unable to repay the loan, your lender may let you do a “rollover” in some cases. 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 Financial 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.
Pros and Cons of Car Title Loans
Despite many downsides, these loans do have a few advantages as a last resort. Below are the pros and cons of getting a car title loan:
| Title Loan Pros | 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 |
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. But be realistic about your ability to repay them. Money issues can cause irreperable harm to relationships.
- 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 typically 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.
Auto Title Loans: Conclusion
Car title loans come with a lot of risks and very few upsides compared to many other types of financing. If you have a clear title on your car, you likely have better loan options available to you. However, as a last resort, they can be an option for fast cash when you need it.
If you decide to take on a vehicle title loan, make sure you fully understand the costs involved and that you truly can repay the balance plus interest when you need to. Failure to do so can leave you in a much worse financial position than you were in before you took the 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.
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Car Title Loans: FAQ
Below are some frequently asked questions about car title loans:
How much can I get from a car title loan?
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.
