Car Title Loans: This Is What You Need To Know
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When you’re short on cash and a bill is due, your car title may be the only place to turn. By pledging your car as collateral, the lender gives you money in exchange for handing over the title until the loan is repaid. But such loans are usually quite pricey. We’ll explain how a car title loan works, the pros and cons, how to make the best of one and some alternatives you may have.
- What is a car title loan?
- The benefits of a car title loan
- The drawbacks of a car title loan
- How to avoid the drawbacks on a car title loan
- Alternatives to car title loans
- The bottom line on car title loans
What is a car title loan?
A car title loan is when you borrow money and offer your car as collateral — and if you default, the lender can repossess your car. Exactly how much you may borrow and how quickly you need to repay the loan depends on your loan contract and the amount of equity you have in your car. The lender may be able to take your car and sell it, keeping the difference between what you owed on the loan and the sale price. What the lender is permitted to do is dependent on your state’s laws, though some states don’t allow vehicle title loans at all.
Note that you will most likely need to pay back more than what you borrow. High APRs, the cost of borrowing, means these are expensive loans. The Federal Trade Commission says lenders often charge a title loan APR of 300%. Some states cap APRs for vehicle title loans, but the Consumer Financial Protection Bureau (CFPB) has extended its deadline for putting new protections into place for borrowers who take on vehicle title and other high-cost installment loans. It has proposed rolling back requirements for lenders to determine upfront if borrowers could afford to repay the loans.
What is a car title, exactly? A car title is an official, state-issued document that says who owns a specific car. It will list the owner’s name and the car’s year, make, model and vehicle identification number (VIN). Every time the car has a new owner and every time the owner moves to a new state, the title will change. Vehicle title loan lenders will often require a “clear” title, meaning you own your car outright.
What if you don’t own your car outright? It may be harder to get a vehicle title loan — you may not be able to borrow as much money, or you may not be able to get a car title loan at all if you already have a loan on your car, depending on your state’s laws. You technically don’t own the car, the lender does. Depending on your state’s law, you may not even have a title in-hand, the lender may have it. If you do have the title and still owe on your car, it will say there is a lien on your car.
The benefits of a car title loan
Car title loans are loans of last resort. It’s possible that a bank or credit union will offer car title loans at lower rates than storefront lenders.
Easier to qualify
Because the lender knows it has something of value to take (your car) if you don’t pay it back, it is likely to have more relaxed credit score and income requirements than those for other types of loans. However, your state might impose certain income or other requirements.
Greater loan amount
Depending on how much your car is worth, you may be able to borrow a greater amount than a payday loan, which is another type of installment loan that uses your paycheck as collateral instead of a car title. Most auto title loans are for 25% to 50% of the car’s value, usually between $100 and $5,500 though some lenders may offer as much as $10,000 or more. On the other hand, many states cap payday loans at $500 or less.
- How do you know how much your car is worth? Lenders will use industry sources like NADAguides to look up how much your car is worth “wholesale.” They will usually offer you less than this amount so that if you don’t pay back the loan and they take your car, they can then sell it for a profit. You can use the same online industry guide for free to get an idea of the amount you could borrow.
The drawbacks of a car title loan
We can’t emphasize this enough — vehicle title loans are expensive, more expensive than nearly any other type of credit.
A cycle of debt
Lenders for car title loans make more money if borrowers stay in debt. In addition to high APRs, title lenders often charge fees or other “add-ons.” If you cannot repay the loan, a “rollover” loan would fold all of those costs into a new loan. What sounds like a plus really isn’t — the new loan would add more fees and interest, making it even more difficult to get out of debt. CFPB data suggest that’s exactly what happens as a significant number of vehicle title loan borrowers enter multiple rollover loans, as many as 22.
You could lose your car
Default on your car title loan, and the lender could repossess your car. To add insult to injury, you may even be charged a repossession fee. Some lenders require borrowers to furnish them an extra set of keys or install a device that could impair your ability to start the engine. These devices may be used for repossession or as a way to remind borrowers to pay their loans. When the CFPB studied vehicle title loan borrowers between 2010 and 2013, 1 in 5 had their vehicle seized.
Alternatives to car title loans
An auto title loan may feel like your only option when money is tight, but it might make your financial situation worse. Here are a few alternatives to consider:
Get a cosigner
Finding someone to cosign for you may make all the difference and help you get approved for a different type of loan with a lower APR.
Personal loans may be unsecured loans or secured, but an unsecured personal loan means that you don’t offer the lender any collateral the lender could take if you don’t pay back the loan. This is obviously an attractive difference versus car title loans, where you could lose your vehicle. It’s always risky to take on more debt in order to pay debt, but a personal loan could be an option for debt consolidation.
- Pros: The lender can’t take your personal property, like your car, if you default; however, not paying will still affect your credit score.
- Cons: It may be harder to qualify for an unsecured personal loan. If your credit is less than stellar, the loan may have a higher APR and you may not be able to borrow the full amount you want.
Personal loans aren’t the only way to consolidate debt. You could read more about how to pay off debt faster using other methods.
If your car note is so expensive that you are having trouble paying other bills, it may be time to downgrade. Instead of using that car title for an expensive loan, sell the car, pay off the loan and take the difference to use as a down payment on a cheaper used car. You could fill out an online form at LendingTree and receive up to five potential auto loan offers from lenders, based on your creditworthiness. There are many banks that offer auto loans to those with bad credit for APRs that would be lower than what you would receive with a title loan.
Credit card advance
A credit card advance is another way to get money when you’re in a bind. Like vehicle title loans, such advances are expensive and carry fees plus high interest, but are typically less expensive than an auto title loan.
Wait and save
Yes, it may hurt your credit to wait and make a payment, but you may be better off in the long run. Even if you are charged interest for a late payment on another loan, that interest may be less expensive than what you might pay on a car title loan. You could also contact your creditors to see if they will work with you.
Ask for credit counseling
For personalized financial advice, there are nonprofit organizations that could help you decide what your best options may be. Make sure you talk to the right organization — the National Foundation for Credit Counseling, for example — rather than a lender that just wants to sell you another type of loan. You could also look on the U.S. Department of Justice website for a list of approved credit counseling agencies in your area.
How to avoid the drawbacks on a car title loan
If you must take out a car title loan, it may not feel like you have time to do your homework, but a little research could save you hundreds, even thousands, down the road.
Shop around for a loan
Don’t say yes to the first loan offer you get. A loan is something you buy — you’re paying for it with the APR — so shop around for the best one for you. You could apply for a car title loan and alternatives, such as a personal loan, to see what offers you receive.
You’re not locked into a loan just by applying for one. You have to apply, receive an offer and accept the offer to be locked into a loan contract. Until you accept a loan offer, you are free to shop around. You could fill out an online form at LendingTree and receive up to five potential personal loan offers from lenders, based on your creditworthiness.
- Make a counteroffer. If you receive two car title loan offers, ask the lender that offered the higher APR loan to beat the lower APR offer you received from the other lender. This way you may be able to get a lower APR loan offer than you originally received.
Understand what you are signing
Don’t be afraid to ask “dumb questions.” Make sure you know how much you’ll pay in total (in a dollar amount, not just a percentage) for the whole loan. By understanding both figures, you’ll have an idea of the total cost of your loan.
For example, an interest rate of 25% per month means you’re paying a total of $625, not including fees, for that 30-day $500 loan.
Make sure you can make the payments
Don’t agree to a high payment because you want some cash now. If you can’t make the payments, you will dig yourself into an even deeper hole. Pay attention to how much is due, when. There are three different types of vehicle title loans — the type you may encounter depends on what your state allows, assuming vehicle title loans are allowed at all:
- Single-payment loans — The loan is typically due in 30 days for a fixed price per $100 borrowed. You would repay the full amount of the loan plus the fee but may be given an opportunity to roll over or re-borrow. This carries risks, as we mentioned earlier.
- Installment loans — You would repay the loan in multiple payments that may be paid in person or debited from your bank account.
- Balloon payment loans — Perhaps less common than the other types of title loans, you would owe one large payment at the end of the loan period after paying several smaller payments along the way.
Learn how to make a budget and check out the best budgeting apps if you’re unsure what you can afford. Having a budget and sticking to it can also help you to avoid the need to take out a car title loan again.
Don’t borrow more than you need
If you only need to borrow a little bit of money, and the lender offers more, don’t accept. The more you borrow, the more you’ll pay in interest. Even if the APR is the same, you’ll be borrowing more money, probably for a longer period of time, and will pay more to the lender overall.
The bottom line on car title loans
A car title loan may make sense if you need money in a hurry and know for sure you can pay back the loan in full before or on its due date. Otherwise, a car title loan could leave you in worse shape than when you started, further in debt and possibly without transportation, the asset you relied on in the first place.