What Is a Car Title Loan?
5 Min Read | Published: July 5, 2023
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A car title loan uses your vehicle as collateral. They’re small, short-term loans that can be easy to get, but can be costly. Learn how they work.
At-A-Glance
- A car title loan is a small loan meant to be repaid after a brief duration.
- The lender keeps your car title as collateral and can take possession of your vehicle if the loan isn’t repaid.
- Car title loans may require few, if any, credit requirements, but they tend to carry high interest.
When you’re in a financial pinch, car title loans may seem like an easy way to quickly access funds. But they can be very expensive – not to mention risky if not paid back. Here’s a look at how car title loans work and other alternatives to consider.
How Do Title Loans Work?
A car title loan is a short-term, high-interest loan of a small amount of money. The lender retains the borrower’s car title as collateral in exchange for the funds. Borrowers might also have to pay the lender a fee to borrow the money or to transfer the title. Title loans usually must be repaid in 15 or 30 days.1
Like other loans, applicants for a title loan typically need to be at least 18 years old. Applicants must have a valid driver’s license issued in the same state where they plan to obtain the title loan, and they usually need to own their car outright and have a lien-free title for the vehicle. But even if you meet these requirements, title loans aren’t always available. In an effort to protect consumers from predatory lending practices, many states have made title loans illegal, and other states have regulations in place to cap interest rates. The Federal Trade Commission (FTC) recommends checking with your state attorney general or state regulator about title lending laws in your area.2
If loan requirements are met and title loans are legal in the borrower’s state, the borrower can typically apply for a title loan from an online lender or at a title loan storefront. The lender may want to see the vehicle, title, and identification. The lender will then appraise the car to determine how much money they’re willing to lend. Once an amount is agreed upon, the borrower transfers the car title to the lender, who then gives the borrower the cash, either on the spot or within a few days. Meanwhile, the lender retains the title until the debt is paid back in full, but you can still drive your car.
If the loan is not repaid, the lender can take possession of the car, or the borrower can “roll over” the loan – a process that allows the borrower to renew the loan for the cost of continued owed interest and additional fees.
Title Loan Calculator
Title loan lenders often provide loans that represent only a fraction of the car’s worth on the open market. The amount typically works out to between 25% and 50% of the car’s assessed value. Title loan calculators available online can roughly estimate how much you might expect to receive based on the year, make, and model of your car. However, you won’t know for sure until a lender completes its appraisal.
Specific loan terms will vary, but here’s an example of how the cost of a title loan might be calculated:
Say your car’s assessed value is $3,000, and the lender decides to offer a 30-day loan of $1,500, or 50% of the assessed value. The loan has a monthly finance fee of 25%, as well as a $30 fee to transfer your car’s title.
A 25% fee on a $1,500 loan is $375. Add the $30 title transfer fee, and the total cost for the loan is $1,905, assuming it’s paid off in full and on time. This means you’d be paying $405 to take out a $1,500 loan – which translates to an APR of over 300%.
Pros and Cons of Title Loans
Title loan lenders seldom check credit history, so if you have poor credit or little credit history but need to take out a small, short-term loan, a car title loan may be a way to secure some funds quickly. For the same reason, a car title loan is unlikely to have any effect on your credit score.
However, car title loans do come with significant risks. For example, the lender may take your vehicle if you cannot repay the money you owe. It’s also likely that you’ll need to pay the lender a fee to borrow the money, and you must repay the loan quickly, typically within 15 or 30 days. Title loans are also expensive. According to the Federal Trade Commission, title loans usually have an average monthly finance fee of 25%, which translates to an APR of about 300%.3
Car title loans can also become potential debt traps. According to a 2016 Consumer Financial Protection Bureau (CFPB) report, more than half of auto title loans become long-term debt burdens.4 A 2021 report by the same agency found that 83% of consumers who had taken out a title loan still owed money on the loan six months later.5
Car Title Loan Alternatives
Given the possible downsides associated with car title loans, you’d be smart to consider alternative ways to obtain fast, needed cash. For example:
- Personal loans from a bank can be paid back over a longer period than a car title loan, and interest rates tend to be significantly lower than those for a car title loan.
- Credit cards are another option. While credit cards charge interest too, the rates are usually far lower than the high fees and interest commonly associated with a car title loan.
- Borrowing from friends or family could potentially save you a lot of money in fees and interest, but remember to treat the request sensibly. The CFPB has a worksheet to help manage family lending.
- Negotiate with the person or company to whom you owe the debt you’re trying to finance. Companies may extend payment terms or break up payments into smaller amounts if you reach out to explain your financial hardship. Just make sure to do this before any payment is due because the sooner you reach out, the sooner it will become clear that you’re making a good faith effort to repay debts.
- Buy now, pay later options are offered by many companies. These financing solutions are short-term installment loans that usually charge little or no interest and must be paid back within a few months. If you’re short on money needed to make an important purchase, like a new refrigerator or other important appliance, this may be an option worth investigating.
The Takeaway
A car title loan is a limited-amount, short-term, high-interest loan where the lender keeps the borrower’s car title as collateral. This means that the lender can take possession of the vehicle if the borrower can’t repay the loan. Though they present a source of quick cash with no credit-check requirement, car title loans have significant downsides and may be illegal in some states. Because of these drawbacks, it’s wise to consider alternative loan sources as well.
1 “What To Know About Payday and Car Title Loans,” Federal Trade Commission
2 Ibid.
3 Ibid.
4 “CFPB Finds One-in-Five Auto Title Loan Borrowers Have Vehicle Seized for Failing to Repay Debt,” Consumer Financial Protection Bureau
5 “Consumer Use of Payday, Auto Title, and Pawn Loans: Insights From the Making Ends Meet Survey,” Consumer Financial Protection Bureau
Justine Brown is a writer based in California who focuses on technology, business, and finance.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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