How Do Title Loans Work?


If you are strapped for cash, you may be thinking about getting a title loan. But, is that really a good idea? Let’s take a look at what a title loan is and some of its advantages and disadvantages.

title loans

What is a car title loan?

A car title loan is a product offered by certain financing companies. The premise is that you obtain a loan, and in return, you put up your vehicle as collateral. You can get a car title loan online or at a physical location.

How do car title loans work?

Usually, a car title loan is for a short time and comes with higher interest rates. In fact, you’ll often see the annual percentage rate (APR) in the triple digits. You must apply for the loan just as you would with any other loan product. However, there’s typically no credit check with title lenders.

The lender will typically ask you to provide employment information and other personal details. However, the lender may not take the time to verify because they have the title to your car to use as collateral.

If you are approved, the lender keeps the title to your car until you pay the title loan off. The loan amount you are approved for depends on the value of your car rather than your credit history. Lenders may offer title loans from 25% up to 50% of the car’s value. In some cases, they may increase the loan amount even higher. They might also take photos of the vehicle to ensure it is in good condition.

You must own your car outright or at least have some equity in it for these lenders to accept your application. The lender often won’t consider a vehicle that already has a lien against it because gaining access to the title is more complicated.

Advantages of Car Title Loans

Car title loans are criticized almost as much as payday loans because of their terms. However, they do offer people an option when they have no other. Typically, car title loan lenders accept your application regardless of your past credit history. The lender may not even run a credit check. They also may not verify any other information, which means you could be approved almost immediately.

A car title loan may seem like the only option for people who need quick cash. Often, you receive the money the same day they apply. Traditional loans can take days or even a couple of weeks before you see the funds.

Unsecured loans are usually a better option than taking out a secured loan, like a payday loan or auto title loan. With an unsecured loan, you can borrow money without having to use collateral, such as property or other assets. Credit cards, personal loans, and student loans are other examples of unsecured loans.

You can find our list of the best personal loans for good credit here and for bad credit here.

Disadvantages of Car Title Loans

There are several disadvantages of car title loans. The most obvious is the high interest rates. If you are in desperate need of cash, you may not think about the cost of the title loan. However, it’s an expensive way to get the funds you need.

Another issue is that it puts you at risk of losing your vehicle. High interest loans translate into higher payments, so you are more likely to default on the loan. If this happens, you lose your car.

The lender sells the car to pay off the loan. Then, you are still responsible for the amount beyond what the sale brings in. If this happens, you really can be left in a worse situation than the one you started.

What to Consider with Car Title Loans

If you are considering a car title loan, first rack your brain to come up with any other options. There are several online lenders who accept borrowers with poor credit. You could also try to get a cosigner on a loan. You may even want to consider a credit card cash advance.

If you have a good relationship with a bank or credit union, consider applying for a personal loan through them. You may be able to work with current creditors if you’re trying to use the money to pay off bills.

The second thing to consider is how much interest you’ll have to pay on top of the loan amount and what your monthly payments will be. Often, car title loans are only for 30 days, with the option to renew if you can’t pay it in full.

Look at the details and think about when you are realistically going to be able to pay the loan off. Then, you’ll want to figure out your budget to make sure you can afford the payment so that you don’t fall behind.

If it’s your only option, you should compare title loan lenders to see who has the best rates and terms. Instead of just accepting the first offer you find, read the fine print of multiple lenders.

Getting a Car Title Loan

You can visit the loan store in person or fill out an application online with many car title loan companies. You’ll need to fill out the paperwork, show a photo ID, and proof of insurance. You’ll also have to bring in the title showing you own the vehicle outright with no lien against it.

Once you’ve been approved for a car title loan, you should read the details before accepting it. Many people make the mistake of believing they must accept the loan if they are approved. Until you sign the actual loan agreement, you are under no obligation.

Review the loan terms to make sure they haven’t changed from what you thought they were when you applied. Occasionally, a lender will show the lowest cost or best APR, but you will be approved for a higher APR or other terms. The reason for the discrepancy may be legitimate, like if you borrowed a larger amount, but you should still be aware of the changes.

Pay attention to the paperwork you sign. In addition to the actual loan document, the lender may require you to purchase other add-ons. For example, they may say you must have roadside assistance or other amenities for your title loan. Take these added expenses into consideration before agreeing to the loan terms.

Paying Your Car Title Loan

Most auto title loans are short-term loans. If you can’t repay the loan, it rolls over into a new loan. More fees and interest are added to the loan, increasing the cost. Traditional lenders allow you to pay over time, such as six or 12 months.

Another option with some title lenders is an interest-only payment. You’re only required to pay the accrued interest until the final payment, which is when the entire balance is due.

The danger with this option is that it gives you a false sense of security that you can make the minimum payment. The issue arises when you have to pay the title loan in total. You’ve been making payments for months, and yet you still owe the entire amount you borrowed.

In some situations, you may be able to defer one or two payments and just pay the interest. This extends the life of your loan, but it can help if you’re short on funds. Most lenders prefer to have you sign up for an automatic debit out of your bank account. But, they do not require you to do so for approval.

Losing Your Car

The most significant danger of title loans is what happens if you can’t pay back what you owe. The lender can begin repossession of the vehicle. This can happen at any time, depending on the terms of your loan. It is legally allowed if you default on your car title loan. Your agreement will define what constitutes a default.

If you know you’re going to have trouble making a payment, contact the lender before it is due to find out your options. It can help prevent you from losing your car.

Frequently Asked Questions

Are all car title loans bad?

Car title loans and the companies that provide them are often considered to be predatory lenders. This is because they prey on people with low credit scores and hardly any options. Lenders often take advantage of these customers, knowing they can never afford to pay back the title loan.

However, not all loan companies that provide title loans are bad. Those who fall under the better group of car title lenders still charge high interest. However, it might be double digits instead of triple digits.

In addition, they offer a longer term, allowing you to pay off the loan a little at a time. You might even find a loan term longer than 12 months, which could offer payments that you may find more affordable.

How do I qualify for a title loan?

To qualify for a title loan, you must own your vehicle outright and have a clear title in your name. You must also be at least 18 years old and have a valid driver’s license.

How much can I borrow with a title loan?

The amount you can borrow will vary depending on the value of your vehicle and your ability to repay the loan.

Is there a penalty for paying off my title loan early?

There is typically no penalty for paying off title loans early. In fact, many lenders may offer a discounted interest rate if you pay off the loan early.

How long does it take to get a title loan?

The process of getting a title loan is usually quick and easy. In most cases, you can have your loan approved and get your money in as little as one business day.

Bottom Line

While most car title loan companies are not the ideal choice for anyone seeking money to pay bills or make a purchase, some lenders are better than others. It may take some effort and time, but you can find these lenders with a bit of research. Search for companies that offer affordable terms and multiple options.

Before you decide to get a car title loan, make sure you have no better alternative. Research companies and choose the one that is the best fit for your needs. Avoid those that seem to make you destined to fail because you risk losing your car if you default on the title loan. Taking on any type of loan isn’t a decision you should make rashly, and a title loan is certainly no exception.

Lauren Ward
Meet the author

Lauren is a personal finance writer who strives to equip readers with the knowledge to achieve their financial objectives. She has over a decade of experience and a Bachelor's degree in Japanese from Georgetown University.