Car title loans are designed for people who need cash fast. They offer a short-term loan using your vehicle title as collateral. Some lenders don’t do credit checks and may not even require proof of employment or income, making auto title loans easy to access, even for consumers with troubled credit histories.
But like many other loans available to consumers with bad credit, the appeal of these cash loans is overshadowed by their high costs and severe consequences if you can’t repay what you owe. Here’s what you need to know about how title loans work and the pros and cons of using them.
How Securities Lending Works
A title loan provides short-term financing for borrowers who own their car or own a significant portion of it. Lenders use your vehicle title deed – a document that proves you own your car – as collateral for the loan and usually require payment within 15 or 30 days.
Lenders can offer title loans online or through a physical location. You will fill out a file to apply. If you are not already in a physical store, you will need to visit one to present your car.
You’ll also need to provide a clear title – although some lenders don’t even require this – photo ID, proof of insurance, and any other documents the specific lender might need. You may also need to give the lender a second set of car keys. That said, you will keep your car during the reimbursement process.
If you are unable to repay the debt on time, you may have the option of turning your existing title loan into a new one, but this will only add more interest and fees. If you end up defaulting, the lender can seize your vehicle and sell it to recover what you owe.
Since title loans can have very high interest rates, they are not allowed in all states. In some they are completely prohibited, and in others there are interest rate caps. In some states, however, there are no regulations.
How much can you borrow?
You can usually borrow between 25% and 50% of the value of your car. Loans can range from $100 to $10,000, depending on the lender. You’ll pay what you owe in person, online or by direct debit from your checking account.
How much do title loans cost?
With such a short repayment term, car title loans are an expensive form of credit, and even the best car title loans can charge three-digit annual percentage rates, which include interest and fees.
“Security loans often come with a host of additional costs, including processing, documentation and loan origination, totaling hundreds of dollars,” says Lyle Solomon, senior counsel at Oak View Law Group, which provides debt relief services. “The purchase and payment of a vehicle roadside assistance package may also be required in some cases.”
For example, let’s say you borrow $800 and the finance charge is 25% of the loan amount, or $200. If the loan is due within 30 days, your APR is around 304%. That’s way more than you’ll pay even with some bad credit personal loans.
“Title loans often fall into the category that many lenders consider predatory lending,” says James Garvey, CEO and co-founder of Self Lender, which offers credit lending.
Do title loans affect your credit?
Generally, title loans do not impact your credit score because there is usually no credit check when you apply. Also, lenders probably won’t report your payment to the credit bureaus, and if you default, the lender will usually repossess your car and sell it instead of sending your debt to a collection agency.
The fact that title loans don’t affect your credit can be a good thing or a bad thing. If your credit history is already bad, that won’t stop you from getting a title loan. Also, missing a payment probably won’t hurt your score any further. On the other hand, making payments on time will also not help your credit score.
Advantages and disadvantages of title loans
As with any financial product, there are usually pros and cons. However, the disadvantages of predatory loans like these usually far outweigh the advantages. Here’s what you should consider:
- Easy qualification. Even if your credit is bad, you can get approved as long as you hold the title to your car, have enough capital, and your income meets the lender’s requirements.
- Simple approval process. You don’t need to submit to a credit check, so the process usually doesn’t take long.
- Quick access to cash. As long as you have everything the lender needs, you can walk out of the store with the money the same day.
- You can lose your car. The worst case scenario with a car title loan is that you cannot repay the debt and the lender seizes your car. According to a 2016 report from the Consumer Financial Protection Bureau (the most recent statistics available), this happens to 20% of people who take out title loans.
- You can easily go over your head. CFPB research also found that more than 80% of auto title borrowers take out a new loan the day the original is due because they can’t afford to repay the first one. More than half of all title loans mature into four or more consecutive loans by the time borrowers can repay the debt. Since each new loan adds more interest and fees, you could end up with a lot more debt than expected.
- Title loans are expensive. Even if you repay on time, title loans incur far higher costs than most other loan options.
Alternatives to Car Title Loans
If you have bad credit, you might think you have no other options. After all, that’s why title loans are still popular, despite being such a threat to your financial well-being.
Still, it’s usually best to avoid this financing option. “Almost every other loan option out there is better than a title loan,” Solomon says. These alternatives can offer borrowers with bad credit access to funds without as much risk as a car title loan.
- Family and friends. Going to family members or friends for money is not easy. But if you have trusted relationships and are confident you can repay what you borrow, consider applying for an unofficial loan.
- Personal loan for bad credit. Some personal lenders specialize in working with people who have bad credit. Interest rates and fees may still be higher than what you would pay with good or excellent credit, but they are likely much lower than what a title lender will charge you, and you will usually get a term longer repayment. This reduces the risk that you will need to re-borrow to pay off your debt.
- Financial aid services. Depending on where you live, your state or local government may provide access to temporary financial assistance. These programs can provide help with medical bills, food, child care, utilities, emergency expenses and more. If you’re looking for quick cash to cover any of these, you might be able to get it without any strings attached or costly debt. You can also find this kind of help through local nonprofits, charities, and religious organizations. Garvey says, “Some nonprofits, such as the Mission Asset Fund, offer low-interest loans (even 0%).”
- Payday advance. Your employer may be willing to provide an advance on your next paycheck. While this can cause problems when you need that money later, it can give you some time to figure things out. If your employer doesn’t offer payday advances, services like Earnin, MoneyLion, Dave, and Brigit allow you to get a payday advance with little or no fees or interest.
- Alternative payday loan. Some credit unions offer alternative payday loans to eligible members. The interest rate on these loans is capped at 28%, making them much cheaper than some traditional personal loans.
- Credit advice. If your financial troubles are a symptom of crippling debt, working with a credit counselor can help you make more room in your budget. Credit counseling agencies may be able to use a debt management program to help you get relief from late payment fees and lower interest rates on your existing loans. Credit counselors can also help you get your finances back on track for the future. Garvey says, “The ultimate key to breaking the cycle of limited options and high interest loans is to build the credit you need to access more reputable financial products.
The important thing is that you take the time to consider all of your options and look for ways to get the financial help you need without sinking deeper into high-interest debt.