Are Title Loans Worth the Cost?

Beautiful young woman opening her car.

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Title loans can provide needed cash fast—particularly to borrowers with bad or no credit. They work by using a vehicle title to act as collateral for the amount of the loan. Lenders offer them as a way for borrowers to cover emergency or other short-term expenses.

Sounds pretty good, right? Don't be so sure. Due to the high cost of title loans, it's important to explore all other options before considering one. Here's what you need to know.

What Is a Title Loan?

Similar to a payday loan, a title loan is a short-term loan with few or no credit requirements. Many title lenders don't even check your credit at all.

Unlike an unsecured payday loan, however, title loans are secured by your car or motorcycle title. Depending on the lender, where you live and the value of your vehicle, you may be able to borrow as little as $100 or as much as $10,000 or more.

The lender typically holds on to your car's title until the loan is paid in full. Despite having collateral to secure the loan amount, title loans are significantly more expensive than most alternatives.

In fact, most states don't even allow title loans. The states that do permit title lenders to operate include Alabama, Arizona, California, Delaware, Florida, Georgia, Idaho, Illinois, Louisiana, Mississippi, Missouri, Nevada, New Hampshire, New Mexico, Oklahoma, Ohio, South Carolina, Tennessee, Texas, Utah, Virginia, and Wisconsin.

How Do Title Loans Work?

You can typically start the application process for a title loan online or at a title lender's store. Loan amounts typically range from 25% to 50% of the car's value, and you need to have the title in your hands, owning your vehicle free and clear. This means it can't be currently financed through another lender.

To complete the application process and get approved, you'll need to bring in your car or motorcycle, a clear title, a photo ID and proof of insurance. You may also need to bring an extra set of keys.

While some states require title lenders to run a credit check, most don't. What's more, title lenders don't even need to check your income in many states to make sure you can repay the loan. Once you sign the contract and agree to pay the loan fees and interest, you'll get your money, and the lender will keep the title until you pay off the debt.

That doesn't mean you have to turn over your car—you can continue to drive it as usual during the repayment process, which typically lasts 15 or 30 days, or longer with some lenders. You can typically make your loan payments in person, through the lender's website or through an authorized automatic withdrawal from your bank account.

If you don't pay back the loan on time, the lender can repossess your car or motorcycle and sell it to get its money back. In some states, if a title lender repossesses your vehicle and sells it, it must pay you the difference between the sale price and the loan amount. Some states, however, allow the lender to keep all the proceeds from the sale.

How Much Does a Title Loan Cost?

Title loans are an easy way to get cash fast. But they can also intensify your financial hardship if you're not careful.

Title loans often charge an interest rate of 25% per month. While that doesn't sound high compared with some personal loans for bad credit, it comes out to an annual percentage rate (APR) of 300%.

As an example, let's say you borrow $500 with the following loan costs:

  • 10% interest rate
  • $150 finance charge
  • $33 title certification fee

If you pay off the loan over 30 days, your total cost will be $687.11, which comes out to an APR of 455.3%!

If your financial situation is already tight, adding fees and interest into the mix can make things more difficult. If you want to avoid repossession of your car but know you aren't going to be able to pay back the loan on schedule, you can opt to roll over the loan into a new title loan. This, however, only adds to the fees and interest already charged, and can trap you in a vicious debt cycle.

Does a Title Loan Affect My Credit Scores?

In most cases, a title loan won't have any impact on your credit scores. That can be good and bad. For starters, most title lenders don't run a credit check when you apply. That check, known as a hard inquiry, typically knocks five points or less off your credit score.

On the flip side, title lenders don't report your payments to the credit bureaus, which means a title loan won't help your credit scores either. If you're applying for a title loan, you've probably had a difficult time getting credit from more traditional sources. In that case, you want any credit or loans you do get to count toward your credit so you can begin improving your credit scores and eventually qualify for more traditional (and less expensive) credit.

If you default on your title loan, the lender is required to comply with the Fair Debt Collection Practices Act. Even so, it will usually repossess the vehicle and sell it, so there's no need to sell the debt to a collection agency or report the delinquency.

Title Loan Regulations for Military Members

The Military Lending Act offers special protection to military service members and their dependents. On title loans with terms of 181 days or less, the maximum APR a lender can charge these borrowers is 36%. Additionally, title lenders:

  • Can't require the use of a check or access to a bank account
  • Can't stipulate mandatory arbitration
  • Can't require unreasonable legal notices
  • Must provide certain disclosures about the loan costs and the borrower's rights

If a title loan agreement violates any of these rules with regard to military service members, it's automatically void. While these extra protections sound great, the cost of a title loan remains onerous—especially if you have to roll over the loan—and should make even these borrowers think twice.

Alternatives to Title Loans

Title loans may seem like an easy way to get the money you need. But with cheaper alternatives available, there's generally no good reason to go this route. Here are just a few other options to consider:

Personal Loans

Many personal loan lenders specialize in working with people who have bad credit. So whether you're looking to finance a large purchase, cover some immediate expenses or consolidate debt, you may still qualify despite having a spotty credit history.

Credit Cards

Most bad-credit credit cards require a security deposit, but not all of them do. Cards like the Indigo® Platinum Mastercard® are designed to help people with bad or no credit build their credit histories without collateral.

Also, many retail store credit cards will approve you if you have bad credit, although often their credit limits are low and APRs are high, and some can only be used at the retailer.

Credit Card Cash Advance

If you already have a credit card and need cash, you may be able to use your card to get a cash advance from an ATM, up to a certain limit.

While cash advances are costly—you'll typically pay an upfront fee and a higher interest rate, and you won't get a grace period—they're much less expensive than a title loan if paid off promptly.

Family or Friends

If you have a good relationship with a loved one, you could get the assistance you need without dealing with high fees and interest rates.

Asking for cash from a family member or friend may be an uncomfortable conversation, but as long as you draw up an official contract and pay the money back on time, you won't risk ruining your relationship.

Military Assistance

If you're a service member or a dependent of one, you may qualify for assistance from a military aid society. Examples include:

  • Army Emergency Relief
  • Navy and Marine Corps Relief Society
  • Air Force Aid Society
  • Coast Guard Mutual Aid

How to Build Credit

If you're considering an auto title loan, it's likely because your credit is in bad shape. While working to build your credit may not get you the cash you need now, it can help you gain better options in the future. Here are some of the best ways to do it:

Use a Credit Card

If you don't have a credit card already, getting one can help you build credit without paying any interest—if you use the card responsibly, keep your balance relatively low, and pay off your balance on time and in full each month.

Pay Other Loans on Time

If you've gotten behind on some payments, get current as quickly as possible. Then make it a priority to make all your monthly payments on time going forward. Your payment history is the most important factor in your FICO® Score , so this action is crucial.

Get Added as an Authorized User

If a loved one has excellent credit and a credit card, ask if they would consider adding you as an authorized user on the account.

Once you've been added, the card issuer should report the account's full history on your credit report (check to make sure they're doing so). If the account is in good standing, it can go a long way to boost your credit score.

Address Potential Credit Report Errors

Sometimes mistakes happen, and erroneous information can show up on your credit report. If this happens, it could negatively impact your credit scores. You can get a free copy of your credit report from each of the credit reporting agencies each year at Experian also offers its own free credit report.

Once you have your reports, look over them to see if there's anything you don't recognize. If there is, you can dispute it with the credit reporting agency and the creditor.

Monitoring your credit scores regularly and addressing problems as they come up will give you a better chance of getting a less expensive loan in the future.

Want to instantly increase your credit score? Experian Boost® helps by giving you credit for the utility and mobile phone bills you're already paying. Until now, those payments did not positively impact your scores.

This service is completely free and can boost your credit scores fast by using your own positive payment history. It can also help those with poor or limited credit situations. Other services such as credit repair may cost you up to thousands and only help remove inaccuracies from your credit report.