Car title loans use a vehicle title as collateral for a short-term loan. If the balance is not repaid under the contract, the borrower may need to renew the loan or risk losing the vehicle. Compare the full cost and review alternatives to car title loans before signing.
Consumer Financial Protection Bureau research on auto title loans found frequent reborrowing and vehicle seizure for some borrowers who could not repay.
What is a Car Title Loan?
A car title loan is a type of secured loan that uses your car as collateral. The lender holds onto your car’s title as security for the loan and in return provides you with a cash loan. You can still use your car while you make payments on the loan, but if you fail to repay the loan, your lender has the right to seize your car. Car title loans are typically short-term loans, with repayment periods ranging from 30 days to a few months.
How Does a Car Title Loan Work?
To get a car title loan, you must first own a car that is paid off or nearly paid off. You then take your car, its title, and proof of insurance to a car title loan lender. The lender will evaluate your car to determine its value and offer you a loan based on a portion of that value. For example, if your car is worth $10,000, the lender may offer you a loan for $5,000.
Once you have agreed to the loan terms, you sign a loan agreement and hand over the car title to the lender. The lender will also place a lien on your car, which gives them the right to seize your car if you fail to repay the loan. You can then use the cash for whatever you need, and you will have to make regular payments on the loan, typically every two weeks, until the loan is paid off.
Pros and Cons of Car Title Loans
Pros:
- Quick Access to Cash: One of the biggest benefits of car title loans is that you can get quick access to cash. If you need money fast and don’t have the best credit score, a car title loan can be an option.
- Easy to Qualify: Unlike traditional loans, car title loans are easier to qualify for since they are secured by your car. You don’t need to have good credit or a steady income to get a car title loan.
Cons:
- High Interest Rates: One of the biggest drawbacks of car title loans is that they come with extremely high interest rates. The average interest rate on a car title loan is 25%, but it can be even higher. This can make it difficult to repay the loan and can lead to a cycle of debt.
- Risk of Losing Your Car: If you fail to repay the loan, your lender has the right to seize your car. This can leave you without transportation and in a difficult financial situation.
- Short Repayment Period: Car title loans are typically short-term loans, with repayment periods ranging from 30 days to a few months. This can make it difficult to repay the loan, especially if you are already struggling financially.