How Do Car Title Loans Work? | Bankrate (2023)

All loans come with risks if they’re not repaid on time. However, a car title loan carries an especially troubling consequence if you fail to meet your payment obligations: The lender can take your vehicle.

Before you consider getting a title loan, it’s vital to understand the potential drawbacks of usingyour vehicle as collateral to borrow money.

What are car title loans?

A car title loan, or “pink slip loan,” allows you to borrow anywhere from 25 percent to 50 percent of the value of your vehicle in exchange for giving the lender the title to your vehicle as collateral. These short-term loans typically start at $100 with repayment periods of 15 to 30 days.

Car title loans cater to consumers with past credit challenges who need fast cash. Most lenders have little to no credit requirements — some won’t even check your credit. The application process is usually simple, and if approved, you can expect to receive funding as soon as 24 hours later — sometimes even sooner.

The ease of access also means these loan products come with steep interest rates. Some states limit how much interest lenders can charge while others have no restrictions. And in some states, lenders are prohibited from offering car title loans to consumers.

If you live in a state where car title loans are allowed, you will generally need to own your car outright to obtain a loan. Some lenders provide these loans if your vehicle is nearly paid off, but this is less common.

How do title loans work?

Car title loans come in a couple of different varieties. Some are single-payment loans, meaning the borrower must pay the full amount of the loan plus the interest rate fee within a month or so. Installment loans can be paid back over three or six months, depending on the lender.

While the term “car” may be in the product name, these loans also can be available for motorcycles, boats and recreational vehicles.

You can apply online or in person, but you’ll need to visit a physical location to show your car to the lender. Also, prepare to provide the lender with a clear title, proof of insurance and a photo ID when applying for a car title loan. The lender may also want a set of keys. The car will remain in your possession during the repayment period unless you default on the loan.

To illustrate how these loans work, assume you own a car worth $5,000, and you find yourself in an emergency and need $1,000. A title loan lets you borrow against your vehicle so you can get the $1,000 quickly.

Just as a mortgage uses your home as collateral, a title loan uses your vehicle as collateral. To get the title to your vehicle back, the loan must be paid in full, including the steep fees the lender charges for providing the money.

These fees typically include an average monthly finance fee of 25 percent, which translates to an APR of 300 percent. On a $1,000 loan, you’ll pay an additional $250 in interest even if the loan is repaid in just 30 days. If you’re late with your payment and late payment penalties are assessed, the loan could cost you a small fortune.

Some lenders also charge origination, processing and document fees, driving the borrowing costs up even higher. You may also be required to obtain and pay for a roadside service plan for your vehicle.

Downsides to title loans

While getting a title loan may be easy, the convenience comes with serious costs and risks, according to Graciela Aponte-Diaz, director of federal campaigns at the Center for Responsible Lending.

“If you can’t pay back the loan when it’s due, it’s rolled over into another cycle with more fees,” says Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling. “It creates a very difficult situation for people who are already struggling to repay. It is the exact definition of the cycle of debt.”

The biggest downside, though, is the potential to lose your car. If you can’t repay the loan, the lender can take your vehicle and sell it to recoup their money. And this isn’t all that uncommon. A study from the Consumer Financial Protection Bureau found that 20 percent of those who take out title loans have their vehicles seized.

Even worse, “some car title lenders install a GPS device — nicknamed a ‘kill switch’ — that can prevent the borrower’s car from starting, using this practice as a means of collecting a debt or making it easier to seize the car,” Aponte-Diaz adds. Given the very real risk of losing your main means of transportation, it’s easy to see how a title loan can be a stressful experience.

Alternatives to title loans

With such serious downsides, McClary recommends reaching out to traditional banks and credit unions to identify less costly lending options. Or you can use a credit card if you have one available to meet your short-term cash needs.

Even if you don’t have a bank account, have a lower credit score or have struggled with poor financial decisions in the past, it’s worth investigating all your alternatives.

“It’s interesting how flexible these traditional lenders can be,” McClary says. “There are a lot of credit unions that are willing to work with unbanked customers.”

Apply for a personal loan

Although qualifying for a personal loan can be challenging if you have bad credit, you may have options. Some online lenders feature bad credit loans you could be eligible for.

If you’re a credit union member, you can also try explaining your situation to a banker. They may approve you for a loan based on the strength of your relationship and good banking history. Or you can ask a friend or relative with a steady source of income and strong credit rating to apply with you as a cosigner, strengthening your approval odds.

Seek a payday alternative loan

Payday alternative loans are another less costly option to consider. They’re available through some credit unions, but you must be a member to access this loan product. Loan amounts range from $200 to $2,000, payable over one to 12 months.

The application fee is capped at $20, and you’ll pay no more than 28 percent in interest. This makes payday alternative loans more affordable than car title loans and some bad credit personal loans.

Use a credit card

You can also use a credit card if you have a dire financial emergency. Or you can pull funds from your credit card through a cash advance.

Be mindful that the interest rate for cash advances is usually higher than you’ll pay for purchases — up to 30 percent variable. Plus, there’s no grace period and interest will start accruing right away. Expect to pay an ATM fee to withdraw funds.

McClary rarely advises adding to credit card debt but says it’s a better option than a title loan, as you’re likely to pay far less in interest than you would with a car title loan.

The bottom line

Car title loans are a convenient option for getting fast cash. Still, the costs are usually not worth the risk involved, and you could end up in a far worse position than you were before taking out the loan. Consider more affordable alternatives, like a credit card, personal loan or payday alternative loan, before settling on a car title loan.

But if you’ve exhausted all your options and must use a car title loan, be sure to read the fine print. Title lenders must show you loan terms in writing before signing, and federal law requires that they be honest and upfront about the total cost of the loan.


What are two disadvantages of a title loan? ›

Disadvantages of a Title Loan
  • They're expensive. Like payday loans, title loans can charge exorbitant APRs. ...
  • Reborrowing and repossession rates are high. ...
  • Lenders can track you and prevent you from driving.
May 4, 2023

What are the typical repayment terms for a title 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.

What is the maximum you can get from a title loan? ›

Title loan lenders generally let customers borrow between 25% and 50% of the value of their title. Once you know how much your title is worth, you can use these percentages to find out how much you can get for a title loan.

What are the advantages of borrowing from a title pawn lender? ›

Advantages of Car Title Loans

Unlike other types of financing, car title loans don't have a complicated or lengthy approval process. Since you are offering a form of collateral, car loans are relatively easy to qualify for, even if you don't have the best credit score.

What is a title loan and why is it a bad way to borrow money? ›

A title loan is a quick and easy way to borrow cash — and fall into a debt trap. When you're in a financial bind and need cash quickly, taking out a car title loan might seem like an easy fix. An auto title loan is a short-term, high-interest loan that uses your vehicle as collateral.

Which statement is a danger of a title loan? ›

The danger with car title loans is that they're very expensive and have such a short repayment window. If you can't repay the loan, rolling it over means racking up more fees and interest. That makes it even harder to repay the loan, a vicious cycle that could end up with you losing your car.

How to negotiate a title loan payoff? ›

Your lender may be willing to negotiate if you can demonstrate financial need and your inability to repay the current terms. When you negotiate, request a lower interest rate, lower monthly payment, longer loan term or a combination. Make sure you can afford the new terms and get all details in writing.

What's the difference between a title loan and a personal loan? ›

In order to get the title to your car back, you have to repay the loan principal in full, plus interest and fees, usually within 30 days. However, a title loan doesn't require a credit check for approval. A personal loan requires a credit check but gives you much more time to repay the loan in fixed installments.

What is one key difference between payday loans and title loans? ›

Payday and title loans are two high-risk loans with very little to offer other than quick access to cash. Underpaid individuals often have to rely on payday loans to pay for necessities between paychecks. Because of the collateral, title loans allow you to borrow much more money than a payday loan.

Does TitleMax check your credit score? ›

TitleMax® does run credit checks on all new applicants, but that may not disqualify you for a personal loan or title-secured loan/pawn. When you need money unexpectedly, it's a good idea to look for loans that offer flexibility for people with bad credit.

What is the smallest title loan you can get? ›

A car title loan is a small secured loan that uses your car as collateral. Car title loans tend to range from $100 to $5,500 — an amount typically equal to 25% to 50% of the car's value.

What is the loan value of my car? ›

To calculate the LTV ratio of a used car, divide its selling price by its book value. Keep in mind that the value of the vehicle you're looking at could vary depending on the valuation tool used by the lender.

What are two disadvantages of a pawn loan? ›

Cons. Loss of collateral: If you're unable to repay the loan, you may lose the item you used as collateral. This is why it may be wise not to put down any items you're not comfortable losing should you not repay the pawn shop loan. High interest costs: Pawn shop loan interest and fees can be expensive.

How do title lenders take advantage of people? ›

More important, short-term, high-interest title loans can be predatory. Lenders often target people who might have difficulty repaying the loan, which could force them to refinance at ballooning costs and potentially lose their car.

Why must a borrower pledge something of value as a collateral to get a cash loan? ›

Collateral is an item of value pledged to secure a loan. Collateral reduces the risk for lenders. If a borrower defaults on the loan, the lender can seize the collateral and sell it to recoup its losses.

What are the negative side of loans? ›

Loans are not very flexible - you could be paying interest on funds you're not using. You could have trouble making monthly repayments if your customers don't pay you promptly, causing cashflow problems. In some cases, loans are secured against the assets of the business or your personal possessions, eg your home.

Does defaulting on a title loan affect your credit? ›

The quick answer is: yes. It will most likely hurt your credit to default on the auto title loan.

Can someone not be on a loan but on the title? ›

Yes, someone can be on the title and not the mortgage. The two terms “deed” and “title” are often used synonymously.

What does it mean to be on the title but not the loan? ›

It is generally okay to have two names on title and one on the mortgage. If your name is on the deed but not the mortgage, it means that you are an owner of the home, but are not liable for the mortgage loan and the resulting payments.

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