Is a Car Title Loan a Good Idea?

Quick Answer

A car title loan is one way to get cash in an emergency. However, these loans come with numerous drawbacks and should generally only be considered after less onerous loan options.

Man charging his EV car considers a car title loan while looking at his phone.

Car title loans are one option to get cash quickly if you find yourself in a tough spot. They do, however, come with a set of rigid terms and conditions that make it an option that should usually be considered after other alternatives.

What Is a Car Title Loan?

Car title loans are short-term loans that offer a way of quickly getting cash by using a car you own outright or one you have equity in as collateral. The lender can offer nearly instant cash, but in return holds the title to your vehicle until you repay the loan—and may take ownership of it if you're unable to repay the loan as agreed. Title loans offer a quick source of money and are often used by people who find themselves in emergency situations, such as facing urgent bills or not having enough cash to make it to their next payday.

Drawbacks of a Car Title Loan

While getting a car title loan might seem like a quick fix in a difficult situation, there are numerous things to consider before applying for one. Some things to keep in mind are:

  • Ownership of the vehicle: To get approved for a car title loan, you need to either own your vehicle outright or have a lot equity in one. If you have a lien on the vehicle, you will not be eligible.
  • High costs: Car title loans are generally short-term commitments with high finance fees that have an equivalent annual percentage rate (APR) of roughly 300%. These fees make this loan type especially troublesome in case of a financial slip-up when paying it off.
  • Vehicle repossession: If you miss payments on your loan, the lender has the right to repossess your car. This can leave you not only without a vehicle but with the negative impact defaulting on the loan will have on your credit. The impact could make it harder to obtain other forms of credit in the future.
  • Limited availability: Not all states allow car title loans.

Alternatives to a Car Title Loan

While car title loans may seem like an easy way to get cash you urgently need, there are other options that could be safer and save you money.

Personal Loans

One way to get your hands on some extra cash is applying for a personal loan. People often opt for car title loans if they have a low credit score and thus few borrowing options. However, it is possible to find personal loans for poor credit. You can also apply for a personal loan with the help of a cosigner who has a better credit score. Just keep in mind that if you fail to make your payments, the cosigner's credit score will be impacted as well unless they step in and assume making payments.

Find a Personal Loan Matched for You

Let us know what type of loan you’re looking for from a list of options.

Step 1

Tell us your income and address—then verify everything is correct.

Step 2

See and compare your best loan offers with no impact to your credit.

Step 3

See if you qualify

Secured Loans

Like car title loans, secured loans use your vehicle as collateral. But the terms and fees on traditional secured loans are different from short-term car title loans. Secured loans are offered by many traditional lenders, and may be marketed as auto equity loans. Since these loans require collateral, they may have a higher borrowing limit or lower interest rate than their unsecured counterparts. It may also be easier to qualify for a secured loan, especially if your credit isn't good enough to qualify you for an unsecured loan.

Payday Alternative Loans

Another good alternative to a car title loan is applying for a payday alternative loan (PAL). Unlike more expensive payday loans, PALs are offered by many federal credit unions. They usually allow borrowers to access anywhere from $200 to $1,000, and you must be a member of a credit union for at least a month prior to applying for the loan. PAL loan APRs are capped at 28%.

Credit Card Cash Advances

A credit card cash advance is another option for quick cash. Credit card cash advances typically charge a standard fee of 5% of the advanced amount or $10 (whichever is higher) but do not require collateral. You'll pay a higher interest rate than the rate on purchases: A cash advance interest rate can be as high as 36%, and interest begins accruing immediately.

Cash advances do not appear on your credit report, but they might affect your credit indirectly. The amount will be added to your credit card balance, which might in turn affect your credit score if your credit utilization rate jumps too high.

Borrowing From Friends and Family

Family and friends may be another option if you are short on cash. If they agree to give a helping hand, it's a good practice to cement the interest rate and payment plan with a contract. This will give the loan more credibility and allow them to feel more secure when helping you out.

Know Your Options

Even when you find yourself stuck in a difficult financial situation, knowing your options is key to ensuring you don't ultimately find yourself in a deeper hole.

If you'd like to avoid a car title loan and a personal loan seems like your best bet, Experian can help you compare personal loan offers based on your credit profile.