A title loan is a short-term, high-interest loan you receive when you provide a car title as collateral for cash. If you don’t repay the loan—usually within 30 days—the lender can take your vehicle.
Definition and Examples of a Title Loan
A title loan is a type of secured loan wherein a car is used as collateral for a short-term loan. A car isn’t the only requirement for collateral; you can use the title to any vehicle, including a motorcycle or truck.
If you only need to borrow a small amount of money, like $1,000, you can go to a lender that offers title loans and borrow what you need. At the end of the loan term, usually 30 days, you’ll pay back the loan, interest, and fees for the money you borrowed. If you fail to repay your loan, the lender has the right to take your car (or whatever collateral you used to secure the loan), sell it, and keep the profit from that sale.
How Title Loans Work
Title loans are a relatively simple process. Here’s an example of using your car to secure a title loan:
- Complete an application.
- Provide a copy of your driver’s license.
- Hand over your car’s title.
- Show the lender your vehicle.
If the lender approves your loan, you’ll get the money while the lender keeps the title to your car (but not the car itself). At the end of the loan’s term—usually about 30 days, but this can vary by lender—you’ll repay the loan, the interest, and the fees.
Say you want to borrow $1,000. The lender fee is 25% of the total amount you borrow and the annual percentage rate (APR) is 300%. To figure out what you’d owe the lender, you would:
- Calculate fees: $1,000 x 25% = $250 in fees
- Calculate annual interest: $1,000 x 300% = $3,000 annual interest
- Divide the annual interest by 12 to get the monthly interest: $3,000 / 12 = $250 in monthly interest
For this title loan, you’d pay $500 in fees and interest for a total of $1,500—or 50% of the amount you borrowed.
To compare, a $1,000 loan at a traditional bank, credit union, or online lender might charge you a 10% APR. If you begin paying that loan immediately and pay it off over the course of one year), you’ll pay about $1,055, plus any fees.
While it could cost $500 to borrow $1,000 via a title loan, a personal loan’s interest and fees might only cost you about $55.
If you can’t repay the title loan at the end of its term, you might be able to extend, or “roll over,” your loan term another 30 days. But that probably means paying additional fees on top of your balance, prolonging the ultra-high APR.
If you still can’t pay your lender, the lender can repossess your car. This gives the lender the opportunity to sell your car and pocket the cash—even if you are still making payments on the vehicle.
Repossession can make it difficult not only to get around, but also to get a new car to replace the taken one. If you lose your car, your credit will tank even further, making it almost impossible to get a car loan to buy or lease a new vehicle.
Title Loan Alternatives
Title loans may seem enticing if you have bad credit, since a credit check isn’t necessarily required to get one. But they aren’t your only option for borrowing money. Consider one of the following:
- A credit card cash advance: While credit card cash advances have their own fees and APRs, their terms tend to be much better than what you’d get with a title loan. You’re limited by the credit limit on the card, and the amount you borrow gets added to your total balance. There’s no grace period; interest starts to accrue the day you borrow the money.
- A personal loan: A personal loan is an unsecured loan where the only thing used to determine your creditworthiness is your credit score. If you don’t qualify for a loan on your own, consider asking a co-signer with solid credit for help.
- A home equity loan or a line of credit: If you’re a homeowner, you may be able to take out a lump-sum home equity loan or a HELOC. A HELOC is a line of credit from which you can draw as needed. Interest rates on either tend to be much lower compared to personal loans, credit card cash advances, and title loans. Your loan terms are also much longer compared—ranging from 10 to 30 years. But this is a type of secured loan. If you don’t pay your loan back, you could lose your home.
- A friend or family member: If you need a short-term loan, consider reaching out to a good friend or family member before taking out a title loan. Their loan terms are likely to be much more favorable and you’re at less risk of losing your vehicle if you can’t repay the loan on time.
- A title loan is a secured loan that uses your car title as collateral.
- Terms for title loans usually last around 30 days. If you don’t pay your loan, APR, and fees back by the end of the term, you could lose your car.
- You can get a car title loan without a credit check and without owning the car outright.
- Alternatives to title loans include credit card cash advances, personal loans, home equity loans, and lines of credit.