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Crash Course:
- Car title loans work by using your car as collateral for short-term financing.
- Most vehicle title loans come with extremely high interest rates.
- Lenders can repossess your car if you fail to repay your loan as agreed to.
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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 extra cash. While car title loans may seem appealing, they can be extremely risky if you don’t have a solid grip on your finances.
This article will explain what car title loans are and how they work before weighing their benefits and drawbacks. To help customers make the best financing decisions, our research team has also searched the industry to identify the best auto loan rates and providers.
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 the car title.
Auto title loans are typically only given to those who have paid off their vehicle in its entirety. However, some car lenders will allow you to take out a loan when your car is nearly paid off.
Main Types of Car Title Loans
There are two different categories of car title loans:
- Single-payment loans: Single-payment title loans are short-term loans that borrowers have between 15 and 30 days to repay in one lump sum. If you don’t repay the balance by your due date, it 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 to 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 also be available for motorcycles, boats, recreational vehicles (RVs), and all-terrain vehicles (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 by using your vehicle as collateral. As a result, most auto lenders don’t need to perform a credit check as part of the process.
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. 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 lower fees than others, but expect that nearly all offers will come with high interest rates.
Some companies have local offices where you can apply in person. If you have specific questions, this can be a good chance to talk through details of the car title loan.
How To Get a Car Title Loan
The auto title loan application process is usually straightforward as long as you follow the steps outlined below:
- Get the required documents: You’ll need a photo ID, proof of income, proof of insurance, and your car title to secure your auto title loan. Gather these documents before applying to ensure a smooth process.
- Fill out your loan application: Lenders often have online applications to use, but you can also visit a physical location in person.
- 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 over one set of keys. Many lenders offer same-day financing, meaning that you can get cash right away.
Are Car Title Loans a Good Idea?
A vehicle title loan is rarely going to be your best financial option. 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 Auto Title Loans
If you’re unable to repay the car title 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 requires that you 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 that 83% of respondents still owed money on their loans.
The CFPB also reported that roughly 20% of borrowers experience repossession if their loans aren’t paid back in full. Car title lenders make most of their money by letting borrowers take out new loans to pay off existing ones, transforming these small loans into long-term debt.
Pros and Cons of Car Title Loans
Despite their many downsides, auto title loans do have a few advantages as a last resort. Below are the pros and cons of getting a car title loan:
| 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 |
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: To avoid financial institutions altogether, try asking friends and family to set up a loan agreement with a payment plan. Be realistic about your ability to repay them since money issues could cause irreparable harm to your 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 car title loans.
Car Title Loans: Conclusion
Auto title loans come with lots of risks and very few upsides compared to other types of financing. If you have a clear title on your car, there are likely better loan options available. However, as a last resort, they can be a choice for fast cash if you need it.
If you decide to take on a vehicle title loan, make sure that you fully understand the costs involved and make sure to repay the balance plus interest when required. Failure to do so could leave you in a much worse financial position than you faced before the loan.
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 possible. It’s wise to read the terms of each loan and check for potential penalties you could face. You can also take advantage of the online prequalification process offered by many financial institutions.
Compare Auto Loan Rates
Compare which options fit your budget, credit score, and term length below.
- All
- 36 to 72 months
- 48 to 84 months
- 24 to 84 months
- All
- 500
- 510
- 550
- 575
- 640
Used Car Loan
Cred Score
Rate Term
APR*
- Great for customers with limited/no credit
- Offers special military rates
- A+ BBB rating
Refinance Loan
Cred Score
Rate Term
APR*
- Average monthly savings of $150
- Work with personal loan concierge to compare options
- A+ BBB Rating
Refinance Loan
Cred Score
Rate Term
APR*
- Customers save 26% monthly on average
- Fast & secure application process
- Sign and upload documents electronically
New Car Loan
Cred Score
Rate Term
APR*
- Below-average credit scores
- Great interest rates
- Smooth and easy online experience
Refinance Loan
Cred Score
Rate Term
APR*
- No application fee
- Lending platform that partners with banks
- Approval and loan terms based on many variables, including education and employment
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 auto 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 application gets approved, 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 an auto title loan, the lender holds onto your vehicle’s title as collateral. If you don’t repay the loan, the lender has the right to repossess the car.
Do car title loans affect your credit?
Most car title loans don’t 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.
