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What is a title loan? What is a car title loan?

A title loan is a type of secured, short-term personal loan that allows you to borrow using your vehicle as collateral. A title loan is different from an auto loan that is used to purchase a vehicle. You can only obtain a title loan if your automobile is paid for. The lender can repossess your car if you do not repay the loan.

How do car title loans work?

Title loans are a unique form of credit. They’re a little bit like the cross between an auto loan and a personal loan. They tend to be short-term loans, like a personal loan. But, they are tied to the value of your automobile, like an auto loan. Unlike an auto loan, title loans can’t help you buy a car. Instead, they are using the value of your automobile as collateral on the loan. And because a title loan is a secured form of credit, you need to have a clear title to your car. 

What you will need to show

When you apply for a title loan, you basically need to prove three things:

  • Who you are (your identity)
  • That you have clear title to your car (meaning that you don’t owe any money on the car)
  • That you have income that will allow you to repay the loan.

Title loan amount

The title company will assess the value of your car and offer you a loan for between 25% and 50% of the total value of your automobile. 

Title loan terms

When the title company gives you a loan offer, they will include the terms of the loan. This will include when payments are due, the length of the loan, and what might happen if you fail to pay. Some title loan companies also require balloon payments during the life of the loan. These are larger payments. 

The loan offer will include the fees associated with the loan. Those fees will definitely include a finance charge or an interest rate. A finance charge is a flat fee for specified length of the loan and an interest rate is an on-going charge based on the amount of money you still owe. There will either be a finance charge or an interest rate, but not both. 

Read the terms of the loan carefully

Some disreputable title loan companies may intentionally make their terms obscure or difficult to understand. They may not clarify whether the interest rate is a monthly rate. Some may sneak a balloon payment in the terms that might be difficult for a borrower to repay. They might even restrict which forms of payment that they accept to induce late fees or defaults. 

Other fees might include an origination fee, a documentation fee, or possibly additional insurance coverage for your automobile. 

The title loan could be a small-dollar, short-term loan that is designed for you to repay within 30 days. Or, a title loan could be a higher loan amount that would require more time for repayment. 

Possible loss of your car

One of the most important things to realize about a title loan is that if you have trouble paying off your loan the title loan company may repossess your automobile. Some title loan companies even require a GPS tracker and a remote ignition suppressor to be installed on your car so that if they need to repossess it it will be easy for them to find. 

Title loan regulations

Title loans are regulated by the state and so there are different rules depending on where you live. Those rules indicate how much can be charged, the length of a title loan’s term, and what rights the lender and the borrower have in the transaction. For instance, some states allow a title loan company to sell repossessed automobiles for more than the value of the remaining loan principal and keep the difference. They may even be able to repossess your automobile even if you only have one payment left. So, caution must be taken when taking a title loan.

How are title loans different than a personal loan?

Title loans and personal loans differ in two significant ways. First, title loans use your car’s title as collateral. This means that if you fail to pay the loan back, the title loan company may repossess your car. Conversely, most personal loans are unsecured, which means you do not need to put up any collateral to obtain them. The second way that title loans differ from personal loans is that title loans usually require that you repay them in a lump sum or in balloon payments. Personal loans are paid in predetermined equal installments.

What do I need to apply for a title loan? How do you apply for a title loan?

Title loans typically don’t require traditional underwriting and therefore the title loan companies are unlikely to pull your credit report. The title loan company is likely to ask you for some or most of the following:

  • Name
  • Address
  • Phone number
  • Clear car title in your name
  • Valid government ID
  • May be asked to show proof of income
  • Must be at least 18 years of age
  • May need to prove full coverage auto insurance: this might be particular to higher loan amounts

How much can I borrow with a title loan?

Many title loan providers advertise that you can borrow up to $10,000, but that doesn’t mean that everyone could borrow that much. Usually, with a title loan, you can borrow between 25-50% of the value of your automobile.  

How much do title loans cost?

Title loan companies have different ways of charging for their loans, so it is essential you pay close attention to the details before you sign. Almost all title loans carry high fees and so should be taken with caution. Part of the confusion about title loans is how they charge interest or a finance charge to their loans.

Finance charges

Some title loan companies often charge a monthly finance fee of 25%. That means for every $100 that are held for a month would come with a $25 charge. Borrowing $1,000 would mean paying back $1,250 in a month. 

The finance charge can often be paid monthly, but it is important to remember that this finance charge doesn’t actually pay down the principal. If you have a finance only payment, you are simply buying another month on the loan. It is possible to pay the finance charges indefinitely and never pay off the principal. 

Fees like this are difficult to translate into an annual percentage rate (APR), but if you were to keep the loan for the full time it would annualize to 300% APR (25% × 12 months = 300%). It is important to realize that you are unlikely to actually spend 300% of your principal on interest since the loans are short-term. If you repeatedly roll the title loan over into another loan, the interest expense could get very expensive. 

Interest rate

Other title loan companies charge an interest rate that is calculated daily on the existing balance. For most loans, the interest rate is stated as an annual percentage rate (or APR). This tells you what the interest rate would be for the entire year. However, some title loan companies simply tell you what the “interest rate” is without making it clear that the rate is a monthly rate. 

It is essential to understand the nature of the interest rate being quoted. For instance, an 18% APR would mean that a $1000 loan paid over the course of a year would cost about $100 in total interest. If your interest rate was 18% per month (this would actually be 216% APR), the interest you would pay for that $1000 loan would be just over $1500. You would be borrowing $1,000, but your total payback would be $2,500. Monthly versus yearly interest rate makes a huge difference. 

It is uncommon for title loans to have an APR below 36% and it is very common for them to be significantly higher. 

What fees do title loan companies charge?

When taking out a title loan, you will want to keep an eye out for the following types of fees or charges that the title loan company might charge:

  • Monthly finance charge: the amount you will be charged each month of the loan
  • Interest rate: the amount you will be charged on the principal still owed. This should be stated as a yearly APR (although some state it as a monthly interest rate), but is usually accrued daily. 
  • Document processing fee: a fee for processing the documents that you provide
  • Loan origination fee: a fee for originating the loan
  • Prepayment penalties: a fee for paying the loan off early (if a lender charges this, it is likely that there will be no way to save money by paying the loan off early)
  • Roadside service plan: a service fee for assistance in case of a problem with your automobile 
  • Full coverage auto insurance: additional insurance that will protect the value of the automobile during the life of the loan

Not all title loan companies will require all of these things, but when you are shopping for title loans, keep an eye out for whether any of these will increase the cost of borrowing. 

How much can I get for a title loan on my car?

The value of your car will determine the amount you can borrow with a title loan. Usually, title loans will allow you to borrow between 25-50% of the Kelley Blue Book value of the car. 

How do I know if a title loan company is legit?

Unfortunately, there are some disreputable title loan companies out there. Some of them actually want you to default so that they can repossess your car and sell it for a profit. Unscrupulous companies may even to get you to sign paperwork that you haven’t read. There have even been reports of some title loan companies that change loan agreements after they have been signed. 

So, how do you know if you are dealing with a good company? First of all, you should see how long the company has been around. If they are new or don’t have reviews online, it might be that they are a shell company. Also, you should pay very close attention to the loan agreement. One red flag is if the sales representative’s explanation of the terms do not align to the agreement. Another red flag would be if the company will not let you take the loan agreement or makes it difficult to obtain a paper copy. 

Are title loans a bad idea?

In one major state, a non-profit organization studied title loans. They found most title loans required full payment in a lump sum, rather than in installments. More than 90% of those single-payment loans resulted in repeating the loan, or rolling it over. Over 60% needed to roll over the loan more than four times. Title loans look expensive at the beginning and could end up being 5 times more expensive than that by the time you’re done with it.

Even after making all those finance payments, the Consumer Financial Protection Bureau found that 1 in every 5 title loans resulted in the borrower’s automobile being repossessed. The odds are very good that you will pay much more than you expect and you might still lose your automobile

What are the monthly payments on a title loan?

Most title loans are designed to be paid in full in a single payment. If you are unable to pay the loan off, you must finance the loan for another month by paying the finance charge or interest payment to extend the loan. This means it is possible to make monthly payments for an extended period of time without ever making progress toward paying down any of the principal. 

How long do you have to pay back a title loan?

For most title loans, you can take as long as you want to pay back the loan, but in the meantime you have to make the finance fee payments to keep the loan active. There are indications that some companies have 90% of its customers who just pay the finance charge to push their loan into the future. Doing this too often and the title loan can quickly become punishingly expensive, without even making progress toward paying it off. 

In many circumstances, the challenge to paying a title loan back is that they require a full payment of the principal to pay off the loan. If you only have part of the payment, you have to resign for another month. If you are not careful, the finance charges can slowly bleed you dry as you try to pull together the principal payment. 

What happens if I don’t pay my title loan?

If you don’t pay your title loan, the title loan company can–and most likely will-repossess your car. Title loan companies are motivated to sell cars to recoup losses due to defaulted loans, so they have extensive experience in taking possession of people’s cars. There are stories of title loan companies that will take years to track down and repossess a car. 

Some title loan companies can be aggressive in seeking payment as well. While there are federally mandated limits to what a lender or debt collector can do to collect on a loan, some lenders are willing to push those limits.

How do you get out of a title loan without losing your car?

Outside of paying your title loan in full, it is unlikely that you can avoid losing your car if you default on your title loan. There are only a few circumstances where a title loan company will choose not to repossess your automobile, but that is usually when the car is no longer operable. As long as the title loan company believes they can make any money selling the car, they will repossess it. 

What are the disadvantages of a title loan?

There are a few disadvantages to taking out a title loan which might cause you to decide to look at other options when you are looking to borrow money. Some of the most obvious disadvantages of a title loan are:

  • It is an expensive form of credit.
  • Paying title loans in full can be difficult which can disrupt your finances for an extended period of time. 
  • If you have trouble paying the title loan, you could lose your automobile. Title loan companies sell repossessed cars to offset defaulted loans. 
  • Some title loan companies can be aggressive when trying to get you to make your payments or when trying to collect the loan.

There are enough disadvantages of taking a title loan that you might be better off dealing with a financial emergency without any borrowing rather than risk losing your car.

Should I get a title loan?

Title loans are an expensive form of credit that can result in losing your automobile. If at all possible, you are better off with an unsecured personal loan even if it isn’t any cheaper. While there may be some circumstances when getting a title loan could help you solve a financial emergency, you should look at other options like borrowing from family and friends, personal loans, or even negotiate to pay a bill over time. Some banks and credit unions also offer loans called a cash out auto refinance.  If your car meets their requirements you may be able to get a loan from them at a significantly lower cost than a title loan.

Do title loans go on your credit score? Are title loans reported to the credit bureaus? Do title loans hurt your credit?

Title loans do not usually show up on a traditional credit report and so will not hurt your credit score. Because title loan companies don’t report to the big three credit bureaus (Experian, TransUnion, and Equifax), you will also not receive credit for successfully paying off a title loan. 

It is possible that title loan companies will report to secondary credit bureaus. While these bureaus don’t contribute to your credit score, defaulting on a title loan might affect your ability to get credit through other non-prime lending companies. 

Are title loans legal in all states?

Title loans are regulated by individual states and so there is a wide range of what is permitted. In many states, traditional title loans are illegal. In another handful of states, there are restrictions on the fees they can charge. When looking into getting a title loan, it is important to understand what your state permits so you can protect yourself and understand your rights. 

Jonathan Walker

Jonathan Walker