How do car title loans work? -Review and Best Practices

Car title loans work by pledging your car for around 25-50% of its actual value in exchange for a short-term loan.

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If your bank account is not very good and you have bad credit, you may have considered a car title loan as a quick way to get some cash. Although they are relatively small sums of money, car title loans can be risky if you don’t have a good handle on your finances.

This article will look at what car title loans are, how they work, and weigh the benefits and risks of getting one. To help consumers make the best financing decisions, our research team also combed through the industry to identify the best car loan companies.

What is a car title loan?

A car title loan is a short term secured loan where the amount you borrow depends on the value of your car. You borrow up to a specific amount or percentage of the value of your vehicle in exchange for the title to your car. Typically, car title loans are only granted to those who have paid off their vehicle in full. However, some lenders allow you to take out a loan when your car is almost paid off.

There are two types of car title loans:

  • One-time payment loans: the borrower must pay the full amount of the title loan plus interest charges in one month or less.
  • Installment loans: these car title loans can be repaid with interest over three or six months, depending on the lender.

Even though “car” is in the name, car title loans may be available for motorcycles, boats, and recreational vehicles like ATVs.

How do car title loans work?

Unlike payday loans, which serve a similar purpose, car title loans work by putting your vehicle up as collateral. These secured loans are usually for small sums of money and often have to be repaid within a short period of time.

For example, imagine you have a car worth $10,000 and need $2,000 for a sudden emergency. Title loans let you borrow against your car, like taking out a mortgage on a house, so you can get that money fast. Until you repay the entire loan, including interest, the lender reserves the right to put your vehicle on rest.

The Pew Charitable Trusts reports that the average car title loan amount is $1,000, but it can range from $100 to $10,000. Because these are short-term loans – with maturities typically between 15 and 30 days – borrowers usually have to pay off the balance in one lump sum.

How to Get Your Car Title After Paying Off a Loan

If you are repaying a car title loan, you notify your local DMV and submit the required documents they provide for your state. After this point, your car title will be considered “free and clear”, which means that you have full ownership of the vehicle.

Car Title Loan Application Process

The process for getting a car title loan is relatively simple:

  1. First, you complete an application. You then show the car, title, and a copy of your photo ID to the lender. You may be asked for duplicate car keys.
  2. If the loan is approved, the car title lender exchanges the money and retains title to the vehicle.
  3. At the time of repayment, you pay the lender a monthly fee in addition to the amount borrowed.

Monthly fees for a vehicle title loan tend to be very high. According to Federal Trade Commission, the average fee is 25%, or an annual percentage rate (APR) of around 300%. It can be costly.

For example, suppose you take out a $500 car title loan with a finance charge of 25%. Twenty-five percent of $500 is $125, which is added to the final amount due. So, at the time of repayment, you owed $625.

Where to apply for a car title loan

Borrowers can get car title loans online and in person. Notably absent from the auto title loan application process is a credit check. Indeed, non-payment of the loan means that the lender can repossess your vehicle.

To approve you for a car title loan, most lenders will require a clear title. This means that you have reimbursed the vehicle. However, some lenders may simply ask you to prove that you have equity in the vehicle.

Why are car title loans risky?

With a car title loan, you not only risk losing your car, but also locking yourself into a cycle of debt. If you are unable to repay the loan, the lender may allow you to “roll over”. A rollover occurs when a lender lets you keep the loan money for an additional 30 days, but guarantees that you will have to pay an additional monthly fee.

Reversals are quite common. In June 2019, the Consumer Finance Protection Bureau (CFPB) surveyed consumers who had obtained auto title loans in the previous six months. It revealed that 83% of respondents still owed money on their loans.

The CFPB also reported that around 20% of borrowers experience repossession if their loans are not repaid in full. According to Forbes, auto title lenders make most of their revenue by allowing borrowers to take out new loans to pay off existing ones. This cycle of small loans becoming long-term debt also ensures business continuity.

What are the pros and cons of car title loans?

If you’re considering taking out a car title loan to meet unexpected expenses, you should consider the pros and cons:

Benefits of car title loan Disadvantages of car title loan
No credit check means approval for borrowers
with bad credit
Monthly payments can turn into long-term debt
You have access to quick cash Your car could be repossessed
Late payments don’t affect your credit score Interest rates are high compared to other options

Car title loans can be attractive to borrowers with poor credit because most title lenders do not perform credit checks. Plus, your credit score won’t be affected if you’re late on a payment. That said, the quick access to cash with a car title loan rarely justifies the high interest rates and the risk of losing a valuable asset.

Alternatives to Car Title Loans

Given that the car title loan data is less than stellar, going another route is probably a smarter financial move. Here are some alternatives to displaying your car title:

  • Payday advance: If you are in good standing with your employer, you may be able to receive part of your salary sooner.
  • Friends and family: If you want to avoid a financial institution altogether, try talking with friends and family to see if you can set up a loan agreement with a payment plan.
  • Credit card: Credit cards have set limits and you will be charged interest if you do not pay your balance by the end of the billing period. Even so, credit cards have lower interest rates than car title loans.
  • Personal loans: These installment loans can be used for almost any financial need and are available from banks, credit unions, and online lenders. They often have repayment terms of one to five years and their interest rates are much lower than auto title loans.

Car Title Loan Review: Conclusion

Car title loans are very risky compared to other loan options and can put you in a cycle of debt. We recommend shopping around and comparing options before deciding on a car title loan.

Top Auto Loan Recommendations

Whether you’re financing a car or using one as collateral, it’s important to compare options to make sure you’re getting the best rate. It is wise to always read the terms of each loan and check for potential penalties. You can also take advantage of online prequalification offered by many financial institutions.

How Car Title Loans Work: FAQs

Below are some frequently asked questions about how car title loans work:

How much title loan can I get for my car?

According to the CFPB, the average car title loan is around $1,000. The usual loan limit is between 25% and 50% of the value of the car.

How easy is it to get a car title loan?

Getting a car title loan is quite simple. The borrower completes an application and lets the lender inspect the vehicle and its title. If ownership of the vehicle is clear and the lender approves the application, the borrower surrenders the title in exchange for a loan.

How do car title loans work?

Car title loans are small, short-term loans subject to high interest rates. With a car title loan, a lender retains title to your vehicle as collateral. If you do not repay the loan, the lender has the right to repossess the vehicle.

Do car title loans affect your credit?

Most car title loans do not require a credit check. This means that a lender likely won’t report payments to credit bureaus because they can repossess the vehicle to settle the debt.

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