What is a car title loan and how does it work? (2023)

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. And while it's highly accessible and easy to qualify for (if you own your car outright), you risk losing your ride if you fall behind in payments. Add in the eye-watering expensive terms and conditions that usually come with these loans, and you have plenty of reasons to look for alternatives before resorting to a car title loan.

Below, CNBC Select explains how title loans work, why you should think twice (or more) before taking one out and what you can do instead.

How do title loans work?

A car title loan allows you to borrow 25% to 50% of your vehicle's value. In return, you agree to pay off the entire loan balance plus interest when the loan term ends — typically, in 15 or 30 days.

To qualify, you'll have to give the lender your car title. Most lenders require that you fully own your vehicle, while others will lend you money if you meet certain equity thresholds. You'll also likely need to provide your photo ID and proof of insurance to the lender, as well as an extra set of keys.

You usually can get a title loan without a credit check or having your income verified (though some states require lenders to do both). This makes getting a title loan incredibly easy, but the terms put the borrower at a huge disadvantage. According to the Federal Trade Commission (FTC), car title lenders typically charge an average monthly finance fee of 25%, which translates to a 300% APR. You might also have to pay extra charges such as processing, document and loan origination fees.

And these already-hefty costs will increase if you need more time to repay the loan. Similar to payday loans, car title loans may allow rollovers, meaning your original loan is renewed into a new one with added interest and fees.

Title loan costs add up quickly

You took out a $500 car title loan for 15 days at a 25% finance fee (or $125), meaning you owed a total of $625 plus any additional fees. When the due date came, you couldn't afford the payment so you rolled the loan over for another 15 days, adding another $125 in finance fees and bringing your total to $750 plus fees. After two more rollovers, your title loan cost you more than you borrowed.

If you fail to repay the money you owe, the lender has the right to repossess your vehicle. In some states, when the lender sells the vehicle, they're allowed to keep the money even if it's more than the amount you owe.

Do title loans affect your credit?

Most of the time, title loans don't affect your credit. If the lender doesn't run a credit check, there will be no hard inquiry on your credit report. By the same token, your on-time payments won't help your credit either since the lender won't report them to credit bureaus.

If you default on the loan, the lender won't need to sell your debt to a collection agency since they get to repossess and sell your vehicle. With the debt satisfied, they don't report the default.

Why are title loans risky?

Thanks to short terms and high costs, a title loan can easily pull you into a vicious cycle of debt. With a rollover being an option, you may find yourself renewing the loan over and over, piling on more debt to avoid losing your car. This is a common scenario — according to a survey by the Consumer Financial Protection Bureau (CFPB), in June 2019, 83% of consumers who'd taken out a car title loan in the previous six months still owed money on it.

Even if you find yourself in a dire financial situation, without an emergency fund and with a credit score that could use some work, consider an auto title loan the last resort and seek out other solutions.

Alternatives to a title loan

When you're struggling with money, it may seem as though you don't have options if you need to come up with cash urgently. Luckily, that might not be true. Here's what you can look into instead of a car title loan:

  • Credit cards. Most of the best credit cards for bad credit are secured, meaning they require you to deposit money as collateral. Still, you can find unsecured cards (like Credit One Bank® Platinum Visa® for Rebuilding Credit) that tend to be accessible to those with low credit scores. Such cards may come with higher interest rates and expensive fees — but those costs are peanuts compared to what a title loan will typically charge. And if you need cash, you can take out a cash advance from your card. A cash advance typically has a higher interest rate and offers no grace period, but if you pay it off quickly, it will still be much cheaper than a title loan.

Credit One Bank® Platinum Visa® for Rebuilding Credit

On Credit One's secure site

  • Rewards

    1% cash back rewards on eligible gas and groceries as well as your monthly mobile phone, internet, cable, and satellite TV services

  • Welcome bonus

    No current offer

  • Annual fee

    $75 for the first year. After that, $99 annually ($8.25 per month)

  • Intro APR


  • Regular APR

    28.99% Variable

  • Balance transfer fee

    See terms

  • Foreign transaction fee

    3% or $1.00, whichever is greater

  • Credit needed

    Poor credit

See rates and fees, terms apply.

  • Personal loans. It's possible to get a personal loan with bad credit. Lenders such as Avant offer loans as small as $1,000 and can send you the funds the next business day after you complete all the paperwork. Again, interest rates and origination fees might be higher than those for borrowers with higher credit scores, yet low compared to car title loans. Plus, you'll get more time to repay the debt.

Avant Personal Loans

  • Annual Percentage Rate (APR)

    9.95% to 35.99%

  • Loan purpose

    Debt consolidation, major expenses, emergency costs, home improvements

  • Loan amounts

    $2,000 to $35,000

  • Terms

    24 to 60 months

  • Credit needed


  • Origination fee

    Range from 0% to 4.75%

  • Early payoff penalty


  • Late fee

    Up to $25 per late payment after 10-day grace period

Terms apply.

Click here to see if you prequalify for a personal loan offer.

  • Family or friends. Asking for help might be the last thing you want to do — and money conversations are rarely comfortable. But your loved ones may be only happy to offer a helping hand. That said, not repaying your friend or family member as agreed won't hurt your credit, but it may hurt your relationship. Be transparent and avoid making promises you can't keep.

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Bottom line

A car title loan might appear as a quick and simple way to borrow some cash but later turn into an expensive debt trap. Avoid this dangerous lending practice and try to look for a different solution to your money crunch. And once you find yourself in the clear financially, work on revising your budget, paying down debt and improving your credit to prevent the same from happening again.

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Read more

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.


What is a car title loan and how does it work? ›

How Title Loans Work in Texas. Title loans are a type of secured loan where the borrower uses their vehicle as collateral. In Texas, title loans are regulated under the Credit Services Organization (CSO) Act and the Texas Finance Code.

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 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 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.

How much can you get for a title loan in Texas? ›

Title Loans in Texas

A Texas title loan can help pay for emergencies when they strike. In Texas, title loans are offered in stores from $100 - $5,000 (not offered in Austin, Dallas, or Fort Worth). If approved, you could walk out with cash in hand!

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.

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.

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 the average length of a car loan repayment? ›

Average auto loan terms

The most common terms are 24 to 60 months, but 72- and 84-month terms are becoming more common. There is no perfect term, and it is instead specific to your budget and needs. A longer term means lower monthly payments, but a higher cost overall.

What happens if you don't pay your title loan in Texas? ›

Car title loans use your car as collateral, so if you default on a car title loan, the lender can repossess your vehicle.

What all do I need for a title loan in Texas? ›

Required Items to Get a Texas Title Loan
  1. Drivers License or State Issued I.D.
  2. Proof of Income.
  3. Lien-Free Title to Your Vehicle.
  4. Your Vehicle for Inspection.

Does a title have to be in your name for a title loan in Texas? ›

A title loan company is there to provide every help possible to its customers; however, the title loan must be in the name of the car owner.

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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