How Do Title Loans Work?

Quick Answer

Title loans are short-term loans that use your vehicle's title as collateral. They can offer quick access to cash, even with bad credit, but they typically come with high costs.

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Title loans can provide you with access to fast cash, even if you have poor credit or no credit history at all. However, these loans can be very expensive and difficult to pay back, so it's important to understand how they work before you apply.

Here's what you need to know about how title loans work and some of the alternatives to consider before you apply for one.

What Is a Title Loan?

Similar to a payday loan, a title loan is a short-term loan with few or no credit requirements. Unlike an unsecured payday loan, however, title loans are secured by your car or motorcycle title.

Here are some of the features of title loans:

  • Loan amounts: 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—usually between 25% and 50% of your car's value.
  • Requirements: A credit check is generally not required to get approved. You may not even need to provide proof of income. However, lenders often require you to own your vehicle free and clear, meaning you're not making auto loan payments on it. When you apply, you'll typically need to bring in your car or motorcycle, a clear title, a photo ID and proof of insurance.
  • Repayment: You'll typically have 15 to 30 days to repay the loan, though some lenders may offer longer terms. During that time, you can still drive the vehicle, but the lender will hold on to your title—some may also ask for an extra set of keys. 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. Depending on where you live, the lender may not even need to pay you the difference between the auction sale price and the loan amount.
  • Availability: Most states don't allow title loans, and they're heavily regulated in many of the states that do allow them. Depending on where you live, they may not be an option.

How Much Does a Title Loan Cost?

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 $688.69, which comes out to an APR of 452.85%.

Title loans can get even more expensive if you can't repay the debt on time and opt instead to roll over your loan into a new title loan. While this can help you avoid repossession, it'll tack on more fees and interest and ultimately trap you in a vicious cycle of debt.

Disadvantages of a Title Loan

While title loans are easy to obtain, there are many reasons why it's best to avoid them and similar short-term loans:

  • They're expensive. Like payday loans, title loans can charge exorbitant APRs. If you're already struggling financially, it's unlikely that a title loan will help you get back on your feet.
  • Reborrowing and repossession rates are high. According to a report by the Consumer Financial Protection Bureau, more than two-thirds of title loan borrowers take out seven or more consecutive loans because they can't repay the debt on time. Ultimately, 20% of borrowers have their vehicle repossessed for non-payment.
  • Lenders can track you and prevent you from driving. Some lenders may require the installation of a GPS tracking device in your vehicle so they can find you if you can't repay your loan. In some states, they may even be able to install a "kill switch" to prevent you from starting the vehicle.

Because of the high costs and risks associated with title loans, it's best to consider other options when you need access to cash.

Does a Title Loan Affect My Credit Scores?

In most cases, a title loan won't have any impact on your credit scores. 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 temporarily.

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.

That said, title lenders also don't report your payments to the credit bureaus, which means a title loan won't help you build credit either. If you're looking for an opportunity to build credit, consider more traditional financing options.

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.

Although some bad-credit personal loans can be expensive and have shorter repayment terms, they're still far cheaper than title loans, and they don't come with the risk of losing your vehicle.

Additionally, some credit unions may offer secured loans, which allow you to use your vehicle as collateral. With this option, you may be able to get a much lower interest rate and a longer repayment term.

Credit Cards

While many bad-credit credit cards require a security deposit, that's not always the case. If you have the ability to wait a week or two to receive a card in the mail, it could make sense to shop around and apply for a credit card.

Also, many retail store credit cards will approve you if you have bad credit, although some may limit where you can use them.

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, it shouldn't put your relationship at risk.

Assistance Programs

There may be nonprofit and community organizations in your area that can help you cover some of your necessary expenses, such as rent, utilities and groceries. Call 211 to connect with someone who may be able to get you the assistance you need.

Take Steps to Improve Your Credit

While building credit might not help you with your current predicament, it can help you gain access to better credit options in the future. Start by checking your credit score and reviewing your credit report to evaluate your current credit health and pinpoint areas where you can make some improvements.

Based on what you find, start taking steps to address the issues that are bringing your credit score down. This may include paying down debt, getting caught up on delinquent accounts and more. You can also review your credit reports for inaccuracies—if you find any, you have the right to dispute them with the credit reporting agencies.

Depending on your situation, rebuilding your credit can take time, but even small efforts can make a big difference in the long run.