What is a title loan?
Short-term loans that use your vehicle as collateral
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People might be tempted to turn to a title loan if they need fast cash, haven’t yet established a credit history or have poor credit. Anyone can qualify for a title loan, so long as they own a car free and clear (meaning they don’t have another loan on it). Also, you might be able to get a title loan approved and funded in less than an hour - a very quick turnaround.
Despite these apparent advantages, title loans can be extremely costly, with annual percentage rates (APRs) of 300% or more. Additionally, they usually have to be fully repaid in a month or less, which can be difficult to do. If you can’t come up with cash on time, you’ll need to extend the loan (and pay more fees), or your lender will take your car and use the proceeds from its sale to pay off the loan.
Title loans are illegal in some states. They typically have very high interest rates and carry risk. Ensure you have a clear understanding of the fees, terms and conditions of any title loan before borrowing.
- Title loans are a type of short-term financing allowing you to get funding in exchange for giving your lender your vehicle’s title.
- These loans are usually repaid in one payment within 15 to 30 days of getting the loan and carry extremely high APRs of 300% or more.
- If you don’t repay the loan on time, your lender will take your vehicle, sell it and use the proceeds to repay your loan.
Understanding title loans
A title loan is a secured loan that uses the borrower’s vehicle as collateral. Lenders will place a lien on the vehicle for the duration of the loan, often 15 to 30 days. They’re typically small-dollar loans with high-interest rates. If you don’t repay the title loan, the loan company can take ownership of your vehicle.
Title loans are similar to payday loans in that they’re both short-term financing you repay in one lump sum for a fixed fee. You can get approved and funded very quickly for these loans, often in less than an hour. Plus, there are very few qualifications you need to meet to get them, and in most cases, there’s no credit check.
However, these loans are often very expensive and difficult to repay, causing people to get stuck in a cycle of borrowing that’s difficult to escape. Since you have to repay everything you borrow in one lump sum in a matter of days, you may not have time to generate the cash needed to pay back the principal plus cover the fees.
Since title loans can be costly and challenging to repay, it’s important to carefully evaluate your options and any alternatives before proceeding. Make sure you can afford to pay the loan on the due date to avoid extra fees and losing your car. If you decide to use a title loan, look for a reputable lender offering reasonable terms, plus check out any customer reviews.
» MORE: What is a personal loan?
The cost of title loans
Fees on title loans often average 25%, which can equate to an APR of 300% or more. Loan amounts of $700 to $1,000 or higher are common for title loans and could even be up to $10,000 or more.
When you sign up for a title loan, your lender will require you to give it the vehicle’s title and charge you a fixed fee in exchange for the loan. At the end of the loan term (usually 15 to 30 days), you must pay the total amount you borrowed plus the fee.
Let’s say you borrowed $700 using a title loan with a 25% fee. When the loan comes due in 30 days, you would owe the lender $875 (the original loan amount plus a $175 fee, calculated as $700 x 25% = $175). If you can’t pay the entire amount when it comes due, your lender may seize your car and sell it to repay the loan.
Alternatively, your lender may allow you to extend the loan in exchange for paying another fee. So, if you extend the loan for another 30 days, you would need to pay another 25% fee, adding another $175 to your financing costs. You’ll pay a similar fee every time you extend the loan.
Title loans pros and cons
Since these title loans are so risky with their high APRs and harsh non-repayment penalty (the lender takes your car if you don’t repay the loan), it’s important to carefully weigh the pros and cons before signing up for one. This will help you avoid getting yourself into a costly and difficult situation.
Below are the pros and cons to consider.
- Quick to get
- Easy to qualify
- Could provide up to $10,000 or more
- Must be repaid very quickly in one lump sum
- Costs are often extremely high
- Vehicle will be taken if loan isn’t paid on time
Title loans and the law
There is no single law governing title loans in the United States. Rather, the laws on title loans vary by state. Research conducted by The Pew Charitable Trusts found auto title lenders operating in 25 states, with lump-sum title loans offered in 20 states.
The research found that lump-sum title loans were available in the following states:
- New Hampshire
- New Mexico
- South Dakota
Notably, laws change from time to time, so you should research your state's laws to see what it allows and disallows as it relates to title loans.
The following are a couple of examples of the nuances of state laws on title loans:
- Oregon: Title loans here must have terms of 31 to 60 days with origination fees of 10% to 30%. This state has no licensed online title lenders (as of publication).
- California: While laws in California limit interest rates on small consumer loans of less than $2,500, these laws don’t pertain to loans of $2,500 or more. Title loan lenders have used this loophole to offer vehicle title loans in that state.
Some states have other restrictions on small loans that affect title loans. For example, Todd Christensen, education manager for Money Fit by DRS, explained that multiple states have “restricted interest rates to such a low level (often 36% APR) that it makes it impractical for vehicle title loan companies to operate within the state.”
Additionally, Erin Kemp, a consumer advocate with Bumper, explained there are also “laws that govern the repossession process for vehicles used as collateral. These laws may specify notice requirements, repossession procedures, and the rights of borrowers during the repossession process.”
She also explained that some “jurisdictions may have cooling-off periods or mandatory waiting periods that give borrowers a window of time to reconsider the loan before it becomes binding. These periods allow borrowers to cancel the loan without penalty within a specified timeframe.”
If you’re unsure of what’s allowed in your state, a good place to start researching the rules may be contacting your attorney general. Also, many states have departments of banking and finance that may be able to provide you with guidance.
Title loan alternatives
A title loan is not the only way to get extra cash in a financial emergency. While a payday loan may seem like a comparable alternative for those who don’t own their car outright, they also come with high-interest rates and penalties. So, it’s also best to avoid these types of loans.
Some alternatives to a title loan you might consider include:
- Payday alternative loan (PAL): You can get PALs from federal credit unions. Terms vary depending on the type of PAL the lender offers, but loans often have loan amounts of up to $2,000 and repayment terms of up to 12 months. In addition, the APR won’t exceed 28%, making it much more affordable than a title loan.
- Personal loan: Offered by banks, credit unions and online lenders, loan amounts may be as little as $250, up to $50,000 or more. Repayment terms commonly range from 12 to 60 months. They can be secured or unsecured. The average rates on 24-month personal loans are 11.48%. These features make them much easier to repay than title loans.
- Home equity loan: This is a loan taken on the difference between the worth of your home and the amount left on a mortgage. A home equity loan can be a good option if you have equity in your home and don’t need money instantly, as it can sometimes take 30 days or more to get funded.
If you have a low credit score – or don’t have a credit score at all – you might still be able to get financing. Some lenders, including those offering personal loans, provide loans with low or no credit score requirements. They might even use alternative credit data to qualify you, like utility bills, cell phone bills or rental payments.
Also, if you have a little bit of cash you can set aside, you may be able to get a secured credit card that you can use as needed. Not only do secured credit cards provide a way to quickly access funds, but they can also help you build a good credit history and score.
Additionally, establishing a banking relationship with a financial institution like a bank or credit union may help you avoid using high-cost financing like title loans and payday loans. Opening a bank account can be a good first step towards building a solid personal finance foundation. Financial institutions may even provide tools you can use for budgeting.
How much money can you get from a title loan?
While the requirements will vary by lender, you can often borrow 25% to 50% of your car’s value with a title loan. Loan amounts often range from $700 to $1,000. However, you may be able to borrow as much as $10,000 or more with a title loan.
How long do you have to pay back a title loan?
You need to repay most title loans in 15 to 30 days. However, these requirements may vary by lender and state. For example, in Oregon, the repayment term on a title loan can’t be any shorter than 31 days or longer than 60 days.
Do title loans affect your credit?
No, in most cases, title loans don’t affect your credit. This is because title lenders usually don’t perform a credit check to approve you or report payments on these loans to the credit bureaus. However, if the lender you choose uses a credit check or reports payments or collections to the credit bureaus, your credit could be affected.
Is a title loan the same as a lien?
No, a title loan is a type of financing, whereas a lien is a legal document showing that a lender has legal rights to a specific asset, like a house or a car. Many lenders require you to pledge assets before approving you for a loan. The lien is a legal document showing that you must pay the lender before anyone else can take possession of the asset.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Federal Reserve, “Consumer Credit - G.19.” Accessed May 26, 2023.
- Bureau of Consumer Financial Protection, "12 CFR Part 1041 - Payday, Vehicle Title, and Certain High-Cost Installment Loans." Accessed May 26, 2023.
- California Department of Financial Protection & Innovation, "Automobile Title Loan Consumer Advisory." Accessed May 26, 2023.
- Consumer Financial Protection Bureau, "CFPB Finds One-in-Five Auto Title Loan Borrowers Have Vehicle Seized for Failing to Repay Debt." Accessed May 26, 2023.
- Consumer Financial Protection Bureau, “Single-Payment Vehicle Title Lending.” Accessed May 26, 2023.
- Consumer Financial Protection Bureau, "Using alternative data to evaluate creditworthiness." Accessed May 26, 2023.
- Federal Deposit Insurance Corporation, "2021 FDIC National Survey of Unbanked and Underbanked Households." Accessed May 26, 2023.
- Federal Trade Commission, "What To Know About Payday and Car Title Loans." Accessed May 26, 2023.
- Federal Trade Commission, “Car Title Loans.” Accessed May 26, 2023.
- Federal Trade Commission, "Pink Slip Slip-Up: First FTC Cases Challenging Deceptive Car Title Loans." Accessed May 26, 2023.
- National Credit Union Administration, “Board Extends Loan Interest Rate Ceiling; Approves Annual Performance Plan.” Accessed May 26, 2023.
- National Credit Union Administration, “Payday Alternative Loan Rule Will Create More Alternatives for Borrowers.” Accessed May 26, 2023.
- National Credit Union Administration, “Payday Loan Alternatives.” Accessed May 26, 2023.
- Oregon.gov, "Personal Loans - Title Loans." Accessed May 26, 2023.
- The Pew Charitable Trusts, "A Map from Auto Title Loans: Market Practices and Borrower Experiences." Accessed May 26, 2023.
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