Key Takeaways

Title loans are short-term secured loans that use your vehicle’s title as collateral. If you own a car and need cash quickly, a title loan can be a quick solution. But they’re expensive and may lead to debt problems down the road. Here’s a deeper look at how car title loans work and things you should consider before you apply for a loan.

Title loans are a quick and easy way to get fast cash, even when you have bad credit. How do title loans work? All loans come with a few risks, but title loans can lead to even more problems if you fail to repay the loan. Your car may be repossessed.

Before you consider applying for a title loan, it is important to understand the costs associated, the risks of using your car as collateral, and some safer alternatives to consider.

What Are Title Loans?

A title loan is a form of secured debt that allows you to borrow money short-term in exchange for your car’s title. Your car will be used as collateral, so you may be able to get approved even with a low credit score. Most lenders do not do a credit check, so they charge high-interest rates. If approved, you may get access to funds in as little as one business day.

If you fail to repay the loan, your car may be repossessed. Typically, title loan lenders will finance cars that are paid off. Some may be willing to lend loans on cars with existing car loan balances. This is known as a registration loan.

How Do Auto Title Loans Work?

The loan amount, interest rate, and terms will vary by car title lender and state. Auto title loans can be anywhere from $100 to $10,000. You’ll typically be required to repay the loan within 15 to 30 days. In some states, longer terms may be allowed. You can borrow a loan against the title of your car, motorcycle, RV, or boat. Most lenders will offer up to 50% of the value of the vehicle. Other than the interest rate, you may also have to pay other fees, which may make your total loan cost higher.

When applying for the loan, you’ll need to fill out a loan application and submit documents such as your photo ID, proof of insurance, and car title. Some lenders may require a set of keys in certain states where it is allowed.

How Do Online Title Loans Work?

Online title loans work the same way regular title loans work, but the entire loan process can be completed online. Typically, here’s the application process you’ll need to follow for most online title loan lenders:

  1. Complete your online loan application.
  2. Upload documents such as your insurance, address, proof of income, and photo ID.
  3. The lender will review your application and will appraise your car. Some lenders will need an in-person appraisal.
  4. If your application is approved, you’ll receive a loan offer. You can sign the contract electronically and hand over your car title.
  5. The lender will then transfer the loan funds to your bank account.  
  6. The car title will stay with your lender until you clear off your debt. You can keep your car if you continue to make payments regularly.

Requirements for Obtaining an Auto Title Loan

If you are over 18 years of age, you may be able to apply for a title loan, even with fair or bad credit. You’ll need to meet a few requirements to be able to get a title loan, as listed here:

Clear Title

One of the most important things you’ll need to get approved for a car title loan is a clear vehicle title. This means that the vehicle should be in your name and must not have any outstanding car loan. The vehicle should also not have been declared a total loss. Some lenders do offer loans on salvage titles, but there may be additional eligibility requirements.

Driver’s License

You’ll also need to provide a photo ID and driver’s license. Your ID will be needed to confirm your address and to prove that you are the owner of the car.

Income Proof and Tax Returns

Most lenders will require you to submit proof of income to demonstrate that you’ll be able to repay the loan. You can submit pay stubs or tax returns.

How Do Title Pawn Loans Work?

A title pawn loan works the same way as a title loan, where you can borrow funds by using your car title as collateral. Title loans are known by many different names, such as title pawn loans, pink slip loans, auto equity loans, and auto collateral loans.

How Car Title Loan Interest Rates Are Calculated

With a title loan, you’ll be able to borrow up to 50% of your car’s value. You’ll have to agree to repay the loan balance along with interest at the end of the loan term, which is typically 15 to 30 days. While this makes them an attractive option, they can be quite expensive. Auto title lenders typically charge a 25% monthly finance fee, which comes to a 300% annual percentage rate. There may be extra charges, such as loan origination, processing, and document fees.

While this is already expensive, the cost can increase substantially if you can’t repay the loan on time. Like payday loans, you can roll over a title loan with added fees and interest. For example, if you took out a car title loan of $1,000 for 15 days at a finance fee of 25% ($250), you’ll need to pay $1,250 plus fees on the due date. If you can’t repay the loan and decide to roll over the loan for 15 more days, you’ll add another $250 in the finance fees, and you’ll now have to pay $1,500 plus fees. After a few rollovers, the loan ends up costing you more than the original amount you borrowed.

Consequences of Defaulting on a Title Loan

One of the reasons title loans can be so risky is that they’re difficult to repay due to the high-interest charges and fees. If you fail to repay the loan, the car title company has the right to repossess the car. In many states, lenders are allowed to keep the funds when they sell the vehicle, even if it is more than the amount of money you borrowed.

Alternatives to Auto Title Loans

Title loans may offer you access to funds fast, even when you do not have excellent credit. But there are several cheaper alternatives available that you might want to consider first.

Personal Loans

Many lenders offer personal loans with bad credit to help you cover emergency expenses. You may be able to qualify for these even with less than perfect credit history. While these are high-interest loans when compared to regular personal loans, they’re still less expensive than title loans and do not come with the risk of repossession. Some credit unions also offer secured loans if you want more favorable interest rates.

Credit Cards

The average credit card interest rate is currently 24.53%, which is more than a personal loan but quite less than a title loan. While it may not always be easy to qualify for a credit card with bad credit, some lenders may be willing to provide you with one against a security deposit.

Credit Card Cash Advance

If you have a credit card and want quick cash, you can use your card for a cash advance. Typically, cash advances are expensive because of the higher interest rate, upfront fee, and no grace period. But if you’re sure you’ll be able to repay it quickly, it can be much less expensive when compared to a title loan.

Family Loan

If you have family or friends who are willing to help, you may be able to get a loan from them at a much lower interest rate. It can be uncomfortable to ask for help, but if you draw up a contract and make sure to repay the loan on time, it is a much better option than a title loan.

Reviews of Title Loan Companies and Their Services

If you decide to apply for a car title loan, be sure to compare lenders and thoroughly check the reviews online. Like payday lenders, title loan lenders may have predatory practices. The best way to learn more about the company is by reading the reviews of past customers. Don’t rely on the reviews listed on the lender’s website. Instead, read reviews on TrustPilot, Yelp, and Google. Additionally, check if the lender is accredited by the Better Business Bureau and if there are any complaints listed against them.

Comparison of Title Loan Rates and Terms from Different Lenders

There’s no single lender that is right for every borrower. To find a lender that is right for you, compare the rates and terms they offer. Here are a few tips to follow when comparing lenders:

  • Most lenders have online calculators that will allow you to determine how much you can borrow and how much you’ll need to pay in finance charges. Use this calculator on multiple lender websites to collect information to compare.
  • Compare the fees charged by different lenders. Many lenders charge expensive fees in the form of origination fees, document fees, and more. Check how much you’ll need to pay if you roll over a title loan.
  • Compare the repayment terms of the loan. Typically, title loans need to be repaid within 15 to 30 days. Check how much you’ll end up paying if you choose a longer term of 30 days Vs. 15 days.
  • Ensure the lender is transparent about their charges and interest rates and that they’re prompt in replying to any questions you may have before you sign the loan agreement.  

Final Thoughts on Title Loans

Title loans, like payday loans, are often the only convenient and quick short-term loan option available to borrowers with poor credit. But even when conventional loan options are not available, there are other alternatives to consider, such as personal loans for bad credit, credit cards, and loans from family and friends.

If you already have over $10k in unsecured debts from payday loans, title loans, or other sources, it is important to take action quickly to pay off your debts and get your finances under control. TurboDebt can help you find the right debt relief option for your needs. Our team will offer you a personalized debt relief option based on your individual needs. Get in touch with us for a free consultation today.