Title Loans Explained

Woman reads paperwork while standing next to car.

When you need money quick, your options are usually pretty limited. Tapping into savings would be great, but most people don't have much saved. Using a credit card is an option, but many consumers are locked out of traditional finance products because of poor credit and limited opportunities to improve.

In this situation, you may find yourself contemplating using some form of fast cash loan. The most well known are payday loans, where you essentially borrow against your next paycheck at a steep fee, and title loans.

Title loans, also known as auto title loans or car title loans, involve using a vehicle as collateral to secure a short-term loan. It's a risky form of financing and it could ultimately cost you one of your most valuable possessions. So how exactly do title loans work, or they safe, and should you ever use one?

How Does a Title Loan Work?

To secure a title loan, an individual must own a vehicle outright (or have a very high amount of equity) and present the title to the lender. The lender evaluates the car's value and offers a loan based on a percentage of that value. The borrower agrees to repay the loan, often within a short period, usually 30 days.

There's usually no credit check or much vetting of the borrower at all. As long as the car has value, the owner's qualifications are secondary.

These loans aren't necessarily limited to automobiles. Depending on the lender, you may be able to borrow against a motorcycle, RV, boat, or any other vehicle, assuming you own it outright and it has sufficient value.

How much money can you get?

Most title loans will max out at out 25-50% of the vehicle's value. The average amount loaned is around $1,000, but the range can be as low as $100 and as high as $10,000.

The money is usually due to be repay after 30 days, but there are some 15 day loans, and there are some lenders that offer three to six month installment loans.

What kind of interest rate should you expect?

A big one. Not as big as payday loan rates, but a title loan's interest will likely be orders of magnitude higher than even your worst credit card rate.

According to the FTC, title loan interest rates can be as high as 25% per month. That's an annual percentage rate of 300%.

For illustration, a $1,000 title loan with a 25% monthly interest rate will cost you $1,250 to repay in full (assuming you're able to pay everything back in 30 days).

Can you extend the repayment period for a title loan?

Most lenders will happily allow you to roll over your loan for another month or more. But they won't do it for free. On top of the interest charges, they may also charge you additional administrative fees every time you extend the loan or roll it over into a new loan. And of course a bigger loan  means a bigger interest charge, creating a cycle that may be close to impossible to escape.  

Can you negotiate with title loan lenders?

Some lenders might be open to negotiations, including restructuring payment plans or reducing interest rates. Unfortunately, there may not be much incentive for them to do so, which makes the likelihood of them helping you out low.

What happens if you default on a title loan?

Defaulting on a title loan can and usually will lead to repossession of the vehicle by the lender. The lender possesses the title, and the agreement you signed when you took out the loan would give them the right to take possession of your car in the event that you stop repaying your loan (or simply fall too far behind, despite efforts to catch up).

The lender will then most likely sell the vehicle and use the funds to offset the defaulted loan. That said, if the return from the sale doesn't cover the loan balance, the lender may continue to attempt to collect the remaining balance from you. That's right: if you default on a title loan, you can lose your car and still owe money.  

Ultimately, title loans are an extremely risky and expensive way to come up with cash quickly. That's why they're primarily marketed toward consumers who simply don't have any other options.

If you're not yet in a situation where you're forced to use a title or payday loan, do everything in your power to make sure you never are. Build your credit. Build your savings. Get a credit card for emergencies. Make moves today to make sure you're not caught in a terrible situation tomorrow.

And if you're already in a desperate financial situation, consider some of the alternatives before committing to a loan with dangerously unfavorable terms. 

Finally, if you're currently struggling with debt, we can help. Our nonprofit experts can provide advice, education, and support to help get you moving in the right direction.

Tagged in Cars and car loans, Smart shopping

Jesse Campbell photo.

Jesse Campbell is the Content Manager at MMI, with over ten years of experience creating valuable educational materials that help families through everyday and extraordinary financial challenges.

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