Payday might still be days or even weeks away, and you need cash for unexpected expenses right now. Car title lenders thrive on these situations, but the general advice from experts is that these loans are probably not your best answer. In fact, the majority of states don’t even allow them.
A car title loan – sometimes called a title pawn, title pledge or pink-slip loan – is a small, short-term, secured loan that’s intended to help out in a cash crisis. These quick cash loans are not offered by banks, but rather by small lenders operating out of storefronts and online.
How a Car Title Loan Works
Let’s say you respond to one of those flashy internet ads that promise cash in minutes. You’re given the address of a location in your area, typically inside a store, and off you go with your vehicle's title, your car, a photo ID, and proof of insurance.
You fill out a loan application. You might have to provide them with an extra set of keys, and you might be required to purchase a roadside assistance plan or install a GPS system or starter interrupt device so the lender can always locate your car or make it inoperable if you default on the loan. You sign a contract and they give you the fast cash you need, anywhere from $100 to thousands of dollars, from 25 to 50 percent of your car’s value.
You turn over the title to your vehicle in exchange for the money. There can be no lien against it. You have to own the car free and clear in most cases. You typically have from 15 to 30 days for repayment of the loan, but it could be a bit longer with some lenders, and some do offer installment terms.
Read More: What Is a Car Title?
The bad news is you’ve just given this lender the right to seize your car and take ownership of it if you can’t pay that cash back. You now have a lien against your car because it’s the collateral for your loan. Repossession could conceivably happen if you’re in a tight financial position at the time to begin with. On the bright side, you can at least keep driving it until you pay off the loan and get the title back.
Advantages of a Car Title Loan
A car title loan can be a godsend in some circumstances, despite the obvious drawbacks. Qualifying is very easy, even with bad credit history or no credit history, because eligibility is not a factor sicen you’re handing over your vehicle as collateral to secure the loan. Many lenders won’t even check your credit, but you might have to prove that you have to provide proof of income.
The loan proceeds will have a minimal – if any – effect on your credit. Your score might take a ding if the lender actually does a “hard inquiry” to check your credit report, but most don’t. Neither will they report your loan activity to the credit bureaus. Title companies usually make an under-the-radar loan.
There’s no waiting period for the money. You leave that storefront with the cash you need.
How Much Does This Cost?
All this convenience can come at some significant cost. You have to pay a fee for the privilege of borrowing. It’s usually tacked on to the balance you’re borrowing, coming due at the end of the loan term. For example, you might owe $625 at the end of 30 days if you borrow $500.
The fee can run as high as 25 percent of the loan amount. Interest will also add on, often at a very high rate, from 25 to 100 percent up to an annual percentage rate as high as 300 percent.
You can also be hit with additional fees as well, including loan origination and lien fees. The lender should provide you with the exact costs, including the interest rate, in writing.
Read More: How to Calculate Interest & Annual Percentage Rates
If You Can’t Repay the Loan
All these add-ons can make it difficult to pay the loan off at the end of the prescribed period of time, and you have to pay back a good bit more than you borrowed. It’s very likely that the lender will repossess your vehicle if you can’t. It will retain possession of your title until you repay the debt.
Borrowers do have one option: a “rollover” loan for an additional term or into a second loan, but this can be pricey as well, adding to the problem. You typically have to pay an additional monthly payment, and interest will keep adding on. Late charges will pile on as well if you inch past the due date and didn’t grab this option well ahead of time.
What happens in a worst-case scenario if your car is repossessed depends on your state. The lender will sell your car, and it’s possible in some jurisdictions that it will keep all the proceeds from the sale. For example, you might owe $1,500 and your vehicle might sell for $3,000. The lender can keep that additional $1,500 in some states, a pretty nice return on its investment. But other states require that it must return any balance to you after the debt is paid off. Federal law has some protections in place for service members.
Do You Have Other Options?
Auto title loans should be an option of last resort. You’d do far better with a personal loan from a bank or credit union if you have at least reasonably healthy credit. Credit unions can be a little more flexible than banks in this regard, and while you have to be or become a member to qualify, it could be worth it. Some personal loan lenders can be a bit more forgiving than large banks when it comes to iffy credit as well.
Another option is to take a cash advance from a credit card if you have one. Yes, you’ll probably pay a higher interest rate on this type of charge than if you had made a purchase with the card, but it still won't be anywhere near what a title loan might cost you. And you might be able to qualify for a card that specializes in helping people with poor or no credit if you don’t already have a credit card, although the application process might take more time than you have.
Another idea is to ask a family member or friend for a loan. Someone might be willing to help you out, particularly in an emergency situation and to prevent you from having to resort to a title loan.
Finally, consider negotiating with whatever party or entity you were going to give the title loan money to. Reach out to creditors, your landlord, or utility companies for some breathing room for paying what you owe. They might be able to work with you, particularly at times when the nation's economy is in distress. Again, you might find that any fees associated are far less exorbitant than those attached to a car title loan.
- Consumer.gov: Car Title Loans
- Infinity Insurance: Car Title Loans – Good or Bad?
- Experian: Are Title Loans Worth the Cost?
- Federal Trade Commission: Car Title Loans
- Bankrate: Car Title Loans – What They Are and How They Work
- Michigan Department of Attorney General: Auto Title Loans – Put the Brakes on Before You Get Caught in a Cycle of Debt or Lose Your Car
- Consumer Financial Protection Bureau. "Car Title Loans." Accessed April 21, 2020.
- The Pew Charitable Trusts. "Auto Title Loans," Page 3. Accessed April 21, 2020.
- Consumer Federation of America. "Driven into Debt: CFA Car Title Loan Store and Online Survey," Page 2. Accessed April 21, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.