What Is A Title Loan & How Does It Work?
A title loan is a short-term, high-interest loan that requires your car as collateral to borrow money. If you don’t have great credit and need to take out a loan, you might be scouring places that will accept your low credit score or sparse credit history. Title loan lenders don’t usually check your credit history, but there are other barriers you might face.
If you’re thinking about a title loan, here’s what you need to know about it before you get one.
What Is a Title Loan?
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. Title loans are usually short-term, high-interest loans that have few requirements, meaning if you have poor credit, you’ll still have an opportunity to qualify. Many times, credit scores and histories aren’t considered at all.
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 approved, you’ll hand over your car title in exchange for the loan. While the lender determines your loan terms, title loans typically have terms of 30 days, similar to payday loans. This means you’ll make one lump-sum payment at the end of your loan period. 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%.
This is where title loans can become a headache. If you don’t repay your loan on time, you can lose your car because it serves as the collateral. So if you do choose to take out a title loan, be sure to pay on time so you don’t risk losing your asset.
How Much You Can Borrow With a Title Loan
Your loan limit is anywhere from 25% to 50% of the total value of the car, and the lender will examine your car to determine its worth. Some loans are as low as $100 while others are upwards of $10,000 or more.
When Should You Get a Title Loan?
According to the Consumer Financial Protection Bureau (CFPB), 20% of car title loan borrowers have their car seized when they can’t repay their loan back in full. Car title loan lenders make the majority of their business off of borrowers who continually take out new loans to cover their old ones. More than half of auto title loans become long-term debt and more than four-in-five auto loans are reborrowed because borrowers can’t pay them off in full with one single payment.
Because of this, you should look toward alternative financing methods before taking out a title loan. Alternative payday loans from credit unions, personal loans from online lenders, credit cards and even borrowing money from friends and family are all better options than potentially losing your vehicle.
Pros and Cons of Title Loans
Before you take out a title loan, review the pros and cons first. This can help you determine if it’s the right move for you.
Pros of Title Loans
- 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.
Cons of Title Loans
- Potential debt trap: The CFPBsays 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.
- Exorbitant interest 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.
Title Loan Alternatives
Almost every option available is most likely better than a title loan. Here are a few to explore if you’re in a tight spot and need the money.
Payday Alternative Loans
Payday alternative loans 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.
You can borrow anywhere from $200 to $1,000, plus interest rates at federal credit unions are typically capped at 18%. What’s more, credit unions tend to work with borrowers who don’t have great credit to find a solution that’s best for them. However, you must be a member of a credit union to get a payday alternative loan.
Personal loans 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.
While personal loans charge interest, rates typically top out around 36%, significantly lower than a title loan. However, you’ll only receive the maximum rate on a personal loan if you have poor or damaged credit. Borrowers with good credit can qualify for rates below 10%. Lastly, repayment terms vary from two to seven years, letting you make affordable monthly payments until your loan is paid off.
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.
If you can afford to repay your balance monthly, you’re essentially borrowing an interest-free loan. Some cards even offer no-interest financing periods for an extended period of time, like the first 12 months of your card ownership. Using an offer like this is a handy way to capitalize on inexpensive financing.
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.
However, borrowing money from relatives can cause emotional—and sometimes financial—strain on your relationship. Take this route with caution and have a repayment plan in mind so everyone is happy with the result.