What is a title loan?

Key points

• Title loans are expensive short-term loans that use your vehicle’s title as collateral.
• While title loans have both pros and cons, the drawbacks heavily outweigh the benefits.
• Title loans are illegal in most states and are heavily regulated in others.

A title loan is a short-term secured loan that uses the title of your vehicle — such as a car, truck or motorcycle — as collateral. These loans typically have lax eligibility requirements but have short repayment terms and high annual percentage rates (APRs).

How does a title loan work?

Title loans are available online, in-store at pawn shops and via payday lenders and cash advance companies. When you apply, the lender will typically ask you to fill out an application and include a copy of your government-issued ID and the title of your vehicle. It will also typically do an inspection of your vehicle to determine how much you can borrow.

There’s typically no credit check involved, making a title loan relatively easy to obtain if you own your vehicle outright. The amount you can borrow depends on the value of your vehicle — you can typically borrow up to 25% to 50% of the value, depending on the lender.

If you’re approved, the lender will give you the loan amount and keep your title. It may also require that you give it an extra set of car keys or even purchase a roadside service plan.

You’ll typically have 15 or 30 days to repay the loan amount plus a monthly fee, which can be as much as 25% of what you’ve borrowed. As a result, title loan APRs can easily climb into the triple digits.

If you can’t repay the loan on time, the lender may allow you to roll it into a new title loan, which tacks on another monthly fee. If it gets to the point where you can’t repay the debt, the lender can repossess your vehicle and sell it, keeping the money.

“Most people need their car, full stop,” says Stanley Himeno-Okamoto, a Certified Financial Planner and founder of DRS Financial Partners. “Whether it’s for work, transporting kids, weekly grocery shopping or other one-offs, a car is necessary when things aren’t within walking distance or other transportation options aren’t feasible. A title loan puts your car at risk.”

Example of a title loan

Let’s say that you need $1,000 to cover some emergency expenses, but your credit score is in bad shape. Other alternatives, such as a personal loan or a 0% APR credit card, may not be on the table for you, but you own your car free and clear, so you consider a title loan.

You take your car to a title loan company and the required documentation for the application. Your vehicle is worth $5,000, so you could technically borrow up to $2,500, but you only take the $1,000 you need.

The lender approves your application and gives you 30 days to repay the loan and the $250 fee tacked onto it in a one-time payment. If you can manage to pay back the loan on time, your APR would be 300%.

But let’s say that, 30 days later, you’re still struggling to get by and can’t repay the debt, so the lender offers to roll your $1,000 balance into a new loan if you pay the $250 fee. Now, you have another 30 days to pay it off and another $250 monthly fee to pay. This new fee increases your borrowing costs to $500 and your APR to about 382%.

Pros and cons of title loans

As with any other financial product, title loans have both advantages and disadvantages. But with title loans, the drawbacks far outweigh the benefits in the vast majority of cases. Here’s what to consider before you apply for one.

Pros

• No credit check: In most cases, title lenders don’t check your credit when you apply. As such, you may be able to qualify even if your credit is poor or you have a major negative item on your credit reports, such as a bankruptcy.
• Quick funding: If you apply for a title loan in person, you can typically leave the store with the cash in hand.
• You keep your vehicle: The lender only keeps the title of the vehicle while your loan is outstanding. You can continue to drive it as you normally do.

Cons

• Very expensive: Title loans typically have triple-digit APRs, making them one of the most expensive forms of consumer debt. If you can’t afford to pay back the loan on time, rolling it over into a new one makes it more expensive. “Being in a strained financial situation to begin with and add in a high interest rate, and you’re walking on a tightrope,” says Himeno-Okamoto.
• Short terms: If you’re struggling with money, having to repay your title loan within 30 days is going to be incredibly difficult. As a result, rollovers are very common. According to a survey by the Consumer Financial Protection Bureau (CFPB), about 83% of title loan borrowers who took out a loan in the past six months still owe money.
• Risk of repossession: If you can’t afford to pay back your loan, the lender may repossess your vehicle and sell it at auction. And depending on where you live, it may not have to give you the difference between the sales price and the loan amount.

Frequently asked questions (FAQs)