Title loan pros and cons: Everything you need to know before you borrow

Title loan pros and cons: Everything you need to know before you borrow

When you have an urgent need for cash, the last thing you want to do is make your situation worse. So it’s a great idea to take the time to learn about your different options for borrowing money, like you’re doing right now. Having all the details could help you feel more confident in your financial decisions.

A title loan could be an easy way to get the cash you need quickly, but it could also lead to a debt trap. And a title loan may not be your only option. Achieve goes over how they work and alternatives to consider if you need money fast.

Key takeaways:

• Auto title loans offer quick access to money, but you’ll need to repay them in a short time.
• Lenders could take your car if you don’t repay the debt.
• Title loans are often extremely expensive.
• Many states ban title loans, and they’re only available in about half of U.S. states.

What is a title loan?

Title loans are short-term loans that use your vehicle title as collateral. Collateral is something valuable you own that guarantees the loan. If you fail to repay the loan, the lender could take your collateral and sell it to recover the money you owe. In this case, it means the lender could take your car if you don’t repay the loan.

A car title loan is sometimes called a “pink slip loan” because prior to 1988, the owner’s copy of a California vehicle title was printed on pink paper. Titles come in different colors, but across the country, some people still refer to the title as a pink slip.

Most title loans are against the borrower’s car, but you could also get a title loan against a boat, RV, motorcycle, or piece of heavy equipment.

Here are some other features of title loans:

• Loan cost: Where it’s allowed, lenders charge $25 for every $100 you borrow. That translates into an annual interest rate of about 300%. Some states cap interest at a lower level. In Tennessee, title loan lenders can charge 2% per month, or 24% per year.
• Amount: $100 to $10,000. Lenders generally allow you to borrow between 25% and 50% of your vehicle’s value.
• Term length: 15 to 30 days. Lenders often require you to repay the full loan amount in one payment.
• Credit and income qualification: No credit check is required. Lenders may note your income, but it’s generally not as important as it may be for other loans.
• Requirements: You must own a vehicle. Most lenders require that you own it free and clear. If a lender says they’ll work with you even if you’re still paying off your car loan, it may mean that they plan to refinance your car loan (pay off your existing car loan and replace it with a new one). Your vehicle must be insured. Your lender may require you to leave a spare set of keys or install a GPS tracking or ignition interlock device to make your car easier to repossess.

How title loans work

One reason people use title loans is that they’re pretty easy to understand—at least, at first. To get a title loan, you would typically drive to a local title loan lender and let them take a look at your car. They’ll decide whether to approve you for a loan, based on the condition and value of your car.

The lender will ask for your car’s title, your photo ID, and proof of income. Next, they’ll estimate your car’s value and offer you a loan, usually between 25% and 50% of your car’s worth. If you agree and sign on the dotted line, you’ll get the cash right then and there.

Then, you leave your car’s title and possibly a spare set of keys with the lender. You’ll pick those up later when you return to repay the loan. Most lenders require you to make one single payment, which is due in one month. If you can’t repay the loan, they may offer to let you roll it into a new car title loan—but with extra finance charges.

Pros and cons of title loans

Every type of debt has its pros and cons. As you read this list, consider how these car title loan features might affect your own family’s finances.

Car title loan pros

• Fast access to cash. Most title loan appointments take 15 to 45 minutes. If you’re approved, you’ll walk away with the money—no need for a bank account.
• Rollover options if you can’t repay the debt. Repaying the full loan amount at once—as most lenders require—could be a financial hardship. If you can’t pay that amount, most lenders let you take out another loan to repay the first one.
• Easier approval if you have credit and income challenges. Pledging your car title as collateral lowers the risk of loss for the lender. If you don’t repay the loan, they could take your car and sell it to recover the money you owe. For this reason, title loan lenders are less worried about your credit standing and income than other lenders. In fact, car title lenders generally don’t even check your credit at all.

Car title loan cons

• Doesn’t help build credit: Like payday loans, car title loan lenders typically don’t report your payment to the credit bureaus. This could hold you back from building a strong credit profile that could later be used to unlock better financial opportunities.
• Expensive way to borrow money: Car title loans are often one of the most expensive loan types around. They may charge rates of around 300% APR and come with numerous other fees. In comparison, the interest rate on a personal loan typically falls between 7% and 36%.
• Risk of losing your car: The biggest risk of a car title loan is the possible loss of your car. If that happens, things could get even worse. Lenders may be able to charge you for the expense of repossessing and selling your car. If they sell your car for more than you owe, they might not be required to give you back the leftover cash.
• Short terms and small loan amounts: The average title loan amount is $1,000 and lasts for 30 days.

Eligibility and requirements for a title loan

The primary requirement to get a title loan is a vehicle that you own. Generally, lenders will also check to make sure you have income and can afford the payment. For many title loans, there is no minimum credit score requirement.

Downsides to title loans

You’re not alone if you need money ASAP. But a title loan may not be the best solution to your problem.

Possible loss of the car

Auto title loan lenders often rely on worried customers. They charge a high price for their service, often beyond what many people are willing to pay: their car.

In fact, according to the Consumer Financial Protection Bureau, about one out of every 10 title loan borrowers eventually has their car repossessed. Pew Research says that for about a third of those people, that was their only car. The consequences of not having your own vehicle could be devastating. It’s easy to slide into overwhelming debt through no fault of your own, especially if you absolutely need your car to get to work.

High cost

Most people won’t have their car repossessed. A study published by the University of Illinois Law Review research showed that most borrowers are overly optimistic about being able to repay the loan on time. In other words, title loans could easily lead to a debt trap.

Generally, if you take out a car title loan, expect to pay high finance fees (title lenders rarely operate in states with consumer-friendly limits). The average car title loan borrower pays about $1,200 per year in fees and interest, according to Pew. That’s higher than the average actual amount borrowed, around $1,000. Lenders might offer to roll over your loan if you can’t repay it, which seems helpful at first—until you realize your loan becomes more and more expensive because of the additional fees.

If you pay that much in fees and interest, it could hold you back from being able to save up an emergency fund. And because auto title loans don’t help you build credit, they can’t help put you in a better position to qualify for more affordable financing options in the future.

Alternatives to title loans

One of the best ways to feel confident that you’re making the right decision is to compare your options. After all, a car title loan is not your only path to getting money when you need it. Here are some other ways to borrow cash fast:

• Paycheck cash advance: Many cash advance apps allow you to borrow up to $500 against your next paycheck, without risking your car. You would need to have set up your account in advance. Watch for fees if you need a same-day transfer.
• Credit unions: Many credit unions offer short-term, small-dollar loans similar to car title loans, but without the high cost and predatory terms.
• Short-term personal loans: Some lenders offer small ($1,000-$5,000) unsecured personal loans. Credit score and income requirements vary.
• Borrow from friends or family: If you have loved ones in your life with the financial means, ask if they’d be willing to lend you some cash. It’s a good idea to have a written loan contract to help set everyone’s expectations. 

Explore these options before you make a final decision on which loan to apply for.

Frequently asked questions

Do title loans affect your credit?

Title loans in good standing are not reported to the credit bureaus and have no impact on your credit standing. If you default, the loan will be reported to the credit bureaus and could have a negative impact on your credit.

How much can you borrow on a title loan?

Title loans are typically limited to 25% to 50% of the value of your car, up to about $10,000.

What is a single-payment loan?

A single-payment loan is a loan that you have to repay in one lump sum. In contrast, an installment loan is a loan that you pay back over time by making payments. A title loan is usually a single-payment loan.

This story was produced by Achieve and reviewed and distributed by Stacker.