What is a title 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.

» MORE: Average personal loan interest rates

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.

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:

• Alabama
• Arizona
• Delaware
• Florida
• Georgia
• Idaho
• Louisiana
• Minnesota 
• Mississippi
• Missouri
• Nevada
• New Hampshire
• New Mexico
• Ohio
• Oregon
• South Dakota
• Tennessee
• Texas
• Utah
• Wisconsin

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.

Other alternatives

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.

Bottom line

There are times when you may be cash-strapped and looking for a short-term solution. Some people turn to title loans. However, before you do so, it’s important to understand the loan you are signing and how these types of loans work.

Plus, carefully evaluate your budget and create a plan to pay off the loan as soon as possible. Remember, if you don’t repay the loan or work out another solution when it comes due, your lender can – and will take – your car. So, take caution with this type of financing to avoid penalties and punitive consequences.