A title loan is a secured loan that lets borrowers use their vehicle as collateral. Since your car secures the loan repayment, the lender can repossess your car if you don’t repay the loan on time.
Unexpected situations or emergencies can wreak havoc on your financial life, but they shouldn’t define your future. Car title loans offer a quick cash solution using your vehicle’s title as collateral. You can use the title on your car, RV, or motorcycle to get a title loan.
- A title loan is similar to a payday loan, with the main difference being that a title loan requires you to post your vehicle as collateral.
- Ordinarily, the lender determines your loan terms, title loans typically have terms of 30 days, similar to payday loans, but you can request a longer or shorter repayment schedule.
- Most title loans don’t require a credit check, which is good if you need to borrow cash and don’t have great credit to qualify for a traditional loan.
- Some states that regulate title loans have limits to how much you can borrow, which can affect the minimum and maximum amount your lender offers.
How Do Title Loans Work?
You can apply for a title loan through a lender that offers one as long as you own your vehicle outright and have a lien-free car title. During your application, you’ll need to show your lender your car, proof of ownership (your car title) and your license.
If your application is approved, you’ll hand over your car title in exchange for the loan.
Ordinarily, the lender determines your loan terms, title loans typically have terms of 30 days, similar to payday loans, but you can request a longer or shorter repayment schedule.
You’re required to make payments on the amount you borrowed, plus any interest and fees. Most lenders charge a monthly fee of 25% of the loan amount, which translates to an annual percentage rate (APR) of at least 300%.
However, if you don’t repay your loan on time, it can become more complicated for you as the borrower. You could lose your car because it serves as the collateral. Therefore, if you do choose to take out a title loan, be sure to pay on time so you don’t risk losing your vehicle.
How much can I borrow with a title loan?
Every lender has their own minimum and maximum loan amount when it comes to title loans. They can start as low as $100 and run as high as $35,000. However, it’s more common to see car title loans from $1,000 to $10,000.
Some states that regulate title loans have limits to how much you can borrow, which can affect the minimum and maximum amount your lender offers. For example, Illinois caps title loans at $4,000, while Mississippi limits title loans to $2,500.
Other states might not limit how much you can borrow but have laws that cap interest rates on certain loan amounts. Until recently, California didn’t have a maximum interest rate on loans over $2,500, so some lenders might still only offer title loans above that amount.
What are the Pros and Cons of a Title Loan?
Before applying for a title loan, as with any financial product, it is important to weigh up the pros and cons:
No credit check: Most title loans don’t require a credit check. This is good news if you need to borrow cash, have exhausted every other option available and don’t have great credit to qualify for a traditional loan.
Quick approval and access to funds: Since there’s no credit check, it only takes a few minutes for lenders to review your application and vehicle. Once approved, you can receive funds almost immediately, or within a couple of days.
Easier to qualify for than other financial products: Car title loans are easier to qualify for than other type of loans because your car is used as collateral for your loan, and you can drive your car the entire time you are paying back the loan.
Potential debt trap: The CFPB says more than half of auto title loans become debt burdens on borrowers. This means that borrowers continue to take out new loans to repay the old ones, carrying on a cycle of debt they can’t get out of. It’s harmful and dangerous, keeping you in debt for months after you’ve initially borrowed.
High interest rates and fees: APRs for title loans can be as much as 300%, due to interest rates, finance charges and other fees. These charges add up, only hurting your financial obligations more.
Short repayment terms: Title loans typically require repayment within 15 to 30 days. Compare this to traditional loans, which typically have repayment terms of six months to three years, depending on how much you borrow. A 15- to 30-day repayment period doesn’t always give you enough time to find the funds to repay the loan you borrowed, plus the high APR.
You could lose assets: Car title loans can put you in a horrible position: continue to rack up a huge debt burden or hand over your car. Stay on top of your payments to avoid the potential burdens title loans can bring.
What are some Alternatives to a Title Loan?
Payday alternative loans (PALs): PALs are small-dollar loans offered by federal credit unions (not all credit unions are federal). They’re similar to title loans, but don’t require collateral. These loans offer small amounts but have friendlier repayment terms, like making affordable monthly payments over the course of a few months. However, you must be a member of a credit union to get a payday alternative loan.
Personal loans: These usually are unsecured loans you can take out from a bank, credit union or online lender. You can use them for nearly anything you need and many offer fund disbursement as soon as the same day you’re approved. Even with poor credit, you might qualify for a personal loan.
Credit Cards: When you apply for a credit card, you’re approved up to a certain credit limit, which you can use on an as-needed basis. You’re expected to repay your balance typically every 30 days, and you can reuse your available limit as you repay it. Any unpaid balances will begin to accrue interest; however, credit cards have much lower interest than title loans.
Friends and Family: Ask around your circle if you can borrow a little bit of cash to avoid falling into a title loan trap. Your loved ones aren’t likely to impose harsh interest rates the same way payday and title loan companies do. They’re also friendly enough to work on a repayment schedule that’s good for both of you.
Should I Get a Title Loan?
Title loans provide fast access to cash, but they can create serious problems for borrowers. The average borrower will pay more in fees than the amount they borrow, and 20% of borrowers have their cars repossessed for nonpayment. Before getting a car title loan, explore other options that can help you get the money you need.