Car Title Loans: What You Need To Know

A car title loan is a short-term loan where the borrower pledges their car as collateral. To get a loan on a car title, the borrower must own their vehicle freely and clearly. If the borrower can not repay the loan, the lender takes ownership of the car and can sell it to get its principal back.

How Does a Title Loan Work

A borrower can apply for an auto title loan through a lender that offers one, as long as you fully own your vehicle and have no-deposit car title. During your application, you will need to show your lender your car, proof of ownership (your car title), and your driver's license.

You'll surrender your car title in exchange for the loan if approved. While the lender sets your loan terms, title loans typically have a 30-day term, similar to payday loans. This means you make a one-off payment at the end of your loan period. You must make payments for the amount borrowed plus interest and fees. Most lenders charge a monthly cost of 25% of the loan amount, which equates to a yearly percentage rate (APR) of at least 300%.

This is where title loans can lead to headaches. If the borrower doesn't repay the loan on time, he could lose a car as it is used as collateral. So if you decide to take out a title loan, pay on time, so you don't risk losing your assets.

How to Get a Title Loan

Title loan requirements include owning a car or having equity to get a car title loan.

This is a secured loan with a car title that uses your car as collateral. Auto title loans range from $100 to $5,500, typically equaling 25% to 50% of the car's value. The loan term is short – usually only 15 or 30 days. And although it's referred to as a "car" title loan, this type of loan applies to other vehicles, including trucks and motorcycles.

You need a clear title - 100% car ownership, with no liens - or at least some equity in your vehicle to get a car title loan.

In addition to the car title, the lender usually wants to see your car, photo ID, and proof of insurance.

If you get approved for your loan on a car title, you give your vehicle title to the lender to guarantee the loan. You will get the title back when you repay the loan.

Car Title Loan Pros and Cons 

Before taking out a title loan, check the pros and cons to understand if it's the right move for you.

Title Loans Benefits 

  • No Credit Check: Most title loans do not have a credit check requirement. This is good if you need to borrow cash, have exhausted all other options available, and don't have a good credit history to qualify for a traditional loan.

  • Fast Approval and Access to Funds: Since there is no credit check, it only takes lenders minutes to review your application and vehicle. Once approved, you can get the money almost instantly or within a few days.

Title Loans Disadvantages 

  • Potential debt trap: The CFPB says more than half of auto title loans become debt burdens for borrowers. That means borrowers keep borrowing new money to pay off old ones, continuing a debt cycle they can't get out of. Keeping you in debt for months after you first borrow is harmful and dangerous.

  • Exorbitant Interest and Fees: The APR on title loans can be as high as 300% due to interest rates, financing fees, and other fees. These fees add up and only hurt your financial obligations even more.

  • Short Repayment Terms: Title loans usually require repayment within 15 to 30 days. Contrast this with traditional loans, which generally have repayment periods of six months to three years, depending on how much you borrow. A 15 to 30 days repayment period doesn't always give you enough time to raise funds to pay back your borrowed loan, plus the high APR.

  • You Could Lose Assets: Auto title loans can put you in a terrible position: you can continue to rack up a considerable debt load or sell your car. Keep track of your payments to avoid the potential burdens that home loans can bring.

Alternatives to Auto Title Loans

Title loans for cars aren't the only way to get quick cash. Consider these options that could be less expensive than a car title loan.

Consider an alternative payday loan from a state credit union.

As an alternative to dangerously expensive payday loans, some state credit unions offer "alternative payday loans" (aka PALs) ranging from $200 to $1,000. The borrower must be a credit union member for at least a month to qualify for a PAL, and you must repay the loan in one to six months. However, the application fee for PALs is capped at $20 or less — and the maximum allowable interest rate is 28%. That's a high rate, but it's still much less than the APR you might end up paying on payday loans, which could even be as high as 400%.

Apply for a loan with a co-signer.

A co-signer with good credit might help qualify for an unsecured personal loan. But co-signers have to take many risks, so finding someone can be difficult. When someone becomes a co-signer, they share the responsibility for paying back the loan with you. If you miss a payment, your balance could suffer along with yours.

Take a cash advance with a credit card.

A cash advance can be a way to borrow money at a lower APR than loans for car titles if you have a credit card with an available balance. But the APR on cash advances is typically much higher than the APR on regular purchases (some APRs on cash advances are over 27%). Also, remember that you will be charged a cash advance fee in addition to the APR. A cash advance fee of around 5% is standard.

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