Everything You Need to Know About Car Title Loans

When money's tight, and you need access to some quick cash, your options are often limited. A short term bank loan would be ideal, but those aren't always readily available – particularly if your credit history is less than perfect. You could pull a cash advance from one of your credit cards, but when times are tough there's a fairly good chance they've already been pushed to the limit. If you own your own vehicle, free and clear, a car title loan may be the answer to your problems.

However, title loans can be a tricky business, and you need to beware of the potential pitfalls if you are going to avoid getting in over your head. Yes, a car title loan can deliver some quick cash in an emergency, but it comes at a price.

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What Is a Title Loan?

In some states a title loan is referred to as a title pawn, and that's a fairly big clue as to how these financial transactions work. Let's say you go to the local pawn shop to drum up some quick cash. You take in a couple of pieces of jewelry, which the pawn broker values according to the current state of the market. You're offered a cash loan against the value of the jewelry, which the pawn broker will hold as collateral, and then given a set schedule for repayment. You must repay the loan within that time frame, plus interest, or forfeit the jewelry. A car title loan works in much the same way.

keys and cash

With a car title loan, the lender will estimate the market value of your vehicle and give you a cash loan based on some fraction of what they believe it to be worth (often around half its wholesale value). The lending company will hold the title to your vehicle as collateral for your loan. You must repay the loan within the predetermined time frame, plus any interest, or the lender will take legal possession of your car, truck, or motorcycle. It is important to understand that these are short term loans, and they typically carry a very high interest rate, especially when compared against traditional auto loans. They can give you access to cash in a hurry, but if you fail to repay the loan on time, and in full, you are essentially selling your vehicle to the lending company at a loss.

Car title loans are available from independent lending companies like TitleMax, and can usually be obtained through pawn shops, cash advance centers, and so called ‘store front lenders‘. There is also a growing trend in online lending companies that specialize in title loans. CarsDirect Automotive Editor Armaan Almeida recently recommended, and as online title loan providers. It's worth noting, however, that some states have made car title loans illegal, classing them as a form of predatory lending. So before you set your sights on a short term title loan you may have to do some research to see if they are an option in your state.

The Pros and Cons to Consider

There are some benefits to applying for a car title loan, chief among them the ability to access some quick cash in an emergency. That being said, the advantages, though real, are somewhat limited and amount to a fairly short list.

  • The application process is relatively simple, and borrowers can be approved within minutes. There is no waiting period to receive your cash.
  • There is rarely, if ever, a credit check. That makes title loans particularly attractive to borrowers with trouble credit histories.
  • You can borrow only the amount of money you need. Banks and credit unions set minimum borrowing limits on personal loans, typically between $3000 and $5000. Smaller, short term, loans are rarely available from traditional banking institutions.
  • You keep the use of your vehicle while the loan is active.

While car title loans can be beneficial in an emergency, they do have some very definite disadvantages. As has already been mentioned, some states have banned title loans due to their predatory nature, and even those that allow them have issued consumer warnings informing borrowers that these types of loans can lead to financial hardship. Before you opt for a car title loan, you should understand the potential hazards.

  • Car title loans come with extremely high interest rates, often as much as a 300% annual percentage rate (APR). A few states have imposed restrictions on how much interest can be charged on a title loan, but even then the rates can be staggering.
  • Title loans are typically accompanied by a number of lending fees, and these can substantially inflate the total cost of the loan. Many lending companies will tack on general application fees, as well as additional charges for processing the lien on the applicant's vehicle. These charges are over and above the interest fees associated with loan itself.
  • These are short term loans, and as such there is little, if any, room for failure on the part of the borrower.
  • Failing to repay the loan on time and in full may result in repossession of the vehicle. If you miss your repayment deadline, some lenders may agree to extend the loan. This is called a ‘rollover'. However, rolling over your title loan will result in additional processing fees as well as the added interest that accrues on the loan amount. Rolling over a title loan can lead to severe financial hardship, and should only be taken as a last resort.
  • Some firms are offering 0% loans in order to get around local restrictions, and then sending customers to other stores with 310% interest rates when it is time to renew the loan.

Applying for a Title Loan

If you own a vehicle, whether it's a car, truck or motorcycle, you may be eligible for a title loan. The amount of that loan will be determined by the current market value of the vehicle, and is typically limited to no more than 50% of its resale value. The process itself is relatively simple, and you will only need a few items to complete your application.

  • The title to your vehicle. Be aware that the lending company will check for any existing liens before approving your loan.
  • Your car, truck or motorcycle. The lender will want to inspect the vehicle to determine its resale value.
  • Your driver's license or other photo ID.
  • A spare set of keys to be surrendered with a copy of your title should your loan be approved.

If the loan is approved, you will receive your cash and the lender will take position of your vehicle's title. This will be held as collateral against the full repayment of your loan, including all fees, taxes, and accumulated interest. Keep in mind, that these are short term loans, and in most cases you will have only 30 to 90 days to make full restitution.

car on money

The Real Cost of Borrowing Against Your Vehicle's Title

While title loans can be an easy source of quick cash, it bears repeating that they come at a very high price. First, there are the exorbitant interest fees to consider. It's important to understand that car title lenders are not subject to the same regulations that govern banks and credit unions, and as such they have a fairly free hand when it comes to setting interest rates. Common-law usury statutes do not generally apply to car title lenders, so many of these companies push the interest on their loans to the absolute upper limits. Moreover, many of these lending companies work devilishly hard to disguise the exorbitant nature of their interest rates, quoting them in months as opposed to years. Let's look at a quick example:

  • You apply for a title loan, and are offered a rate of 6%. Not ideal, surely, but on the face of it not too terrible either. That is, until you do the math. The 6% you've been quoted is the monthly interest fee, which in reality is equivalent to 72% per year. That's a staggeringly high rate, and one that no other lender would legally be allowed to offer it's customers.

If you decide to apply for a car title loan, pay close attention to the interest fees being offered. Perform some quick calculations to determine the actually annual interest rate before you agree to the contract.

Of course, the true cost of a car title loan doesn't end with the interest you pay. Most, if not all, lenders will charge additional fees, over and above the monthly or annual interest rate. These added charges can make a car title loan even more difficult to manage, often adding as much as 25% to the total cost of the transaction. These additional fees include, but are not limited to:

  • Processing Fees – Most lenders will charge a set fee for processing the loan and filing the necessary paperwork.
  • Lien Fees – An auto lien is required for all title loans, and represents the lender's legal claim to the vehicle being used as collateral. The fees necessary to process and file a lien are typically passed on to the borrower by most title lending companies.
  • Late Fees – As with any loan agreement, late fees apply to the repayment schedule.
  • Roadside Assistance Fees – Some lenders require borrowers to sign on for a roadside assistance program, the charge for which is added to the total cost of the loan. Borrowers may also be required to rent a GPS device, which will be installed on their vehicle so the lender can track its location.
  • Early Repayment Penalties – Car title lenders make their profits off of the interest they charge on their loans, and early repayment doesn't really suit their bottom line. In most cases, these lenders will charge a penalty for early repayment as a way to make up what was lost on the loan's interest.

Before signing any agreement with a car title lender, be sure that you understand not only how the interest will be calculated, but also how any additional charges will effect the total cost of your loan. Remember, if you default on the loan the lender has the lawful right to repossess your vehicle, and you will have little, if any, legal recourse in the matter.

Alternatives to Consider

Car title loans do have their place, and in times of emergency they may appear to be the only viable option to scare up some much needed cash. That being said, they are far from ideal and should only be considered as a last resort. If you find yourself in a financial bind, and in need of some ready money, there are some alternatives to car title loans that may be able to deliver the short term cash you need without the additional risks. Before you decide to hock the family car, consider the following options:

  • A Cash Advance on Your Credit Card – A cash advance on a credit card can be expensive, and you will be expected to pay a higher than normal interest rate for the privilege. However, in the long run, it can still be cheaper than a car title loan. Admittedly, if you are considering borrowing against the equity in your car, there's a good chance your credit cards are already maxed out. Still, it's worth checking with your bank to see if you can extend your line of credit to cover the current emergency.
  • A Personal Loan from Your Bank or Credit Union – If you have a healthy credit score, and are a customer in good standing at your bank or credit union, you may qualify for a small personal loan. While you may ultimately have to borrow more than you need to cover the current emergency, the lower fees and interest rates may make the larger loan more affordable in the long term. A personal bank loan will also be easier to manage, due to its longer repayment schedule.
  • An Emergency Loan from Your Employer – While it may be somewhat embarrassing to borrow money from your employer, some companies do offer short term loans for employees who find themselves in a financial bind. The terms of these loans vary from firm to firm, but they usually offer fairly low interest rates and easily manageable repayment terms. If you find yourself in need of a quick influx of cash, check with the human resources department at your firm to see if you qualify for an employee based loan.
  • Pawning or Selling Other Valuables – Depending on the amount of cash you need, pawning or selling some personal items might be the better option. If you have any jewelry, musical instruments, or electronics that you can sell you may be able to raise the money you need without taking on any more debt. Even if you simply pawn these items, the risk will be much lower than that of a car title loan. True, if you fail to repay the pawn broker you will forfeit your valuables. But if you fail to repay a title loan your will lose your vehicle, and that can cause further financial hardship down the road.
  • Payday Loans – Payday loans are another form of predatory lending which are also plagued with extremely high interest rates. Under normal circumstances, a payday loan would not be advisable. However, if you're in need of some fast cash they are an option, and at the very least you will not be risking the loss of the family car if you can't repay the loan on time. We offer a guide highlighting nearly a dozen safer alternatives to payday loans.

signing a deal

Final Thoughts

Car title lenders exist because they serve a purpose, and fill a niche in the financial landscape. In extreme circumstances, a car title loan may be the only option available to access some quick cash. However, they are a form of predatory lending and as such should be viewed with caution.

Before you risk your vehicle on a short term loan, investigate any and all other alternatives first. If you ultimately decide that you need to apply for a car title loan, do so with care. Compare and contrast different lenders until you find the best deal. Read all of the fine print, and be certain that you fully understand your responsibilities as a borrower, as well as the costs and the risks inherent in the loan.

Finally, borrow only what you need to cover the current emergency, and devote all of your attention to repaying the loan on time and in full as per your contract. Otherwise, you risk the loss of your vehicle and further financial hardship in the future.