What Is a Title Loan, and How Does It Work?
Summary
A title loan is a short-term, high-interest loan that uses your car’s title as collateral. Learn how title loans work and consider some lower-risk alternatives.
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When you’re short on cash and facing an emergency, it can be tempting to accept any financial relief you can find. But if you’re considering a title loan, it’s important to learn what it is and understand the potential dangers and risks of this loan option. The following information could help you make an informed decision.
What is a title loan?
A title loan is a short-term, high-interest loan that uses your car title as collateral. Collateral is something of value you possess that the lender can take to recover what you owe if you don’t repay your loan.
Title loans are also known as car title loans, pink-slip loans, fast auto loans or title pawns. When you take out a title loan, you typically borrow a small amount of money with a high annual percentage rate (APR) — often upwards of 300% — which could make it difficult to pay back if your finances are already stretched thin.1
How does a title loan work?
Title lenders usually require borrowers to own their vehicle outright, but some may still provide funds if you’ve paid off most of your car loan.2
In exchange for a title loan, you give the lender the title to your car, truck or motorcycle as collateral. Typically, title lenders allow you to keep driving your car while you pay off the loan and only hold onto the physical title document as collateral.
However, some lenders may require that you allow them to install a GPS tracking or “kill switch” (a starter interrupter device) on your vehicle.3
How much money can you borrow with a title loan?
Title loan amounts typically range from 25% to 50% of the total value of your vehicle. Depending on the lender and the value of your vehicle, you may be able to borrow anywhere from $100 to $10,000 or more.4
How long do you have to pay back a title loan?
Unlike personal loans, which typically allow borrowers two to five years to repay the loan, repayment terms for title loans are short, usually 15 to 30 days. Repaying a loan so soon could be difficult if you're already struggling to make ends meet.
If you can’t repay the loan in full after the initial term, the lender may allow you to “roll over” the loan to the next month. However, this option involves high fees, and not all lenders will allow it.
If you’re unable to pay off the loan in time and the lender does not allow you to roll over the loan, you risk losing your vehicle.5
While less common, some lenders require borrowers to pay title loans back in monthly payments, usually within three to six months.6
What are the risks of title loans?
If you’re considering taking out a car title loan, it’s important to be aware of the risks involved. The main risks of taking out a title loan include:
- Potentially losing your vehicle if you cannot pay back the loan: The biggest downside of taking out a car title loan is the possibility of losing your vehicle if you can’t repay the loan. If you default on your loan, the lender has the right to take your car, which could lead to greater financial hardship.
- Paying extremely high interest rates compared to other types of loans: With a title loan, you might end up paying the lender much more than you originally borrowed.
- Falling into a cycle of unmanageable debt: With an APR that can typically be as high as 300%, a title loan is expensive and might put you in a cycle of debt that places you in a worse position than you were in the first place.
Be aware that some title loan lenders target borrowers with low income and a limited or less-than-perfect credit history. You may feel some pressure to make a quick decision or accept a loan offer that seems too good to be true.
Alternatives to title loans
If you’d rather avoid the risks and high costs that come with title loans, consider these options when you need funds quickly.
Emergency loan
An emergency loan is a personal loan from a lender, bank or credit union. An emergency loan will usually have a lower interest rate and better terms than a title loan. For example, with a OneMain emergency loan, your monthly payment will be the same every month, as long as all your payments are made on time.
One of the benefits of an emergency loan is that you can choose how long you’d like to take to repay the loan. Unlike a title loan that measures your loan term in weeks, you’ll have the option to repay your loan over a year, or two or more.
Remember, your credit history plays a role in determining your eligibility and interest rate for a personal loan.
Credit card cash advance
If you have a credit card, you might be able to use it for a cash advance. A cash advance lets you withdraw cash from your card’s available credit line. The amount you borrow will be added to your balance and accrue interest until you repay it.
Before taking a cash advance, make sure you understand what it will cost over time. The APR for cash advances is usually higher than the APR for purchases you make with your card.7 Keep in mind that there is no grace period for a cash advance, so the advance starts accruing interest as soon as you make the transaction. There’s typically also a transaction fee.
Peer-to-peer loan
Online peer-to-peer (P2P) lending platforms connect borrowers with individual investors willing to lend money. Rates might be competitive, and the application process is usually straightforward. However, P2P lenders tend to charge higher interest rates than traditional borrowing options.
If you decide to use a P2P lending platform, do your research to avoid loan scams. Read reviews of the platform to get an idea of its reputation and check what kind of security measure they have in place.
Emergency assistance program
Some local organizations and charities offer financial assistance to individuals facing emergencies. To find these programs, check your state or local government's website. Programs are often listed under social services or community resources.
You can also call 211 or visit 211.org to find and connect with resources that help with basic needs like housing, food, transportation and health care.
Negotiate with creditors
If your financial struggles are due to existing debts, consider negotiating with creditors to lower interest rates or arrange more manageable payment plans.
Borrow from family or friends
While this option requires caution and clear terms, borrowing from loved ones can be a cost-effective way to get financial help without the pressure of steep interest costs and short repayment terms.
401(k) loan
If you’ve exhausted your other options, you may choose to consider a 401(k) loan. When you take out a 401(k) loan, you borrow money from your own retirement account instead of a lender. You repay what you borrow over time with interest, either directly or through payroll deductions. Not all plans allow 401(k) loans. Check with your plan administrator to see if this is an option for you. It could give you financial support you need without the high cost or added risk.
Use an emergency fund
Consider establishing an emergency fund over time to have a financial cushion for unexpected expenses. This proactive approach could help you avoid the need for a high-cost loan.
Should I get a title loan?
Before committing to a title loan, consider your financial situation carefully. You may want to explore other lower-risk borrowing options, such as an emergency loan from a reputable lender with more realistic terms.
Losing your vehicle is a major risk with title loans. Making an informed decision about whether to take out a title loan could help you avoid unnecessary debt and protect your assets.
This article has been updated from a previous posting on March 20, 2024. Kim Gallagher and Jessica Leshnoff contributed.
Sources
1 https://www.creditkarma.com/personal-loans/i/how-do-title-loans-work
https://www.consumeradvocates.org/for-consumers/predatory-lending
https://www.nerdwallet.com/personal-loans/learn/what-is-predatory-lending
2, 5 https://consumer.ftc.gov/articles/what-know-about-payday-and-car-title-loans
3 https://www.experian.com/blogs/ask-experian/how-do-title-loans-work/
4 https://www.experian.com/blogs/ask-experian/how-do-title-loans-work/
6 https://www.bankrate.com/loans/auto-loans/car-title-loans/#drawbacks
7 https://www.experian.com/blogs/ask-experian/what-is-a-cash-advance/
This article is for general education and informational purposes, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any purpose and is not intended to be and does not constitute financial, legal, tax, or any other advice. Parties (other than sponsored partners of OneMain Financial (OMF)) referenced in the article are not sponsors of, do not endorse, and are not otherwise affiliated with OMF.
