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Title loans: A risky and expensive way to borrow money in a pinch

December 7, 2022, 4:31 PM UTC
Photo illustration of a set of car keys on top of paperwork with a toy car and calculator in the background.
You typically have 15 to 30 days to repay the loan principal, plus any interest charges.
Photo illustration by Fortune; Original photo by Getty Images

There are a number of ways to borrow money in a pinch. 

A title loan is a short-term loan that may be particularly appealing to people with bad credit who own a car outright and are comfortable using it as collateral to get cash quickly. But these loans come with a unique set of risks, and many states have made them illegal.

Here’s what you should know about title loans—and their alternatives—before applying for one. 

What is a title loan and how does it work?

When you take out a title loan, you hand over your car title—which proves legal ownership—in exchange for a lump-sum payment. But like any loan, it needs to be repaid. You typically have 15 to 30 days to repay the loan principal, plus any interest charges. If you fail to do so, the title loan company can repossess and sell your car to recoup its losses.

These loans generally come with double-digit interest rates and excessive fees, but they can be appealing to borrowers with low credit scores or no credit history at all, since they don’t require a credit check. Oftentimes, lenders will only ask to see the car, car title, photo ID, and proof of insurance when a borrower applies, according to the Federal Trade Commission (FTC), an agency that enforces consumer protection laws.

“The high interest payments and the fees compensate [lenders] for taking the risk and being able to provide that cash right away without doing a whole bunch of credit checks or jumping through a whole bunch of background checks or anything like that,” says Casey Pisano, a certified financial planner at Biondo Investment Advisors.

How much can you borrow with a title loan?

Title loans have a controversial history, in part because of exploitative interest rates and fees. In 29 states, title loans are illegal, says Omar Ochoa, a Texas-based trial attorney who specializes in consumer issues. Another four states allow title loans, but impose limits on interest rates, fees, and repayment terms, he says, while 17 states allow them with no restrictions.

How much you can borrow usually depends on the value of your car and the individual title loan company. The FTC says the maximum borrowing limit is usually 25% to 50% of your car’s value. But how much you have to repay to the title loan company will be substantially higher, thanks to fees and interest.

The average monthly “finance fee,” or interest rate, on a car title loan is 25%, the FTC says. For comparison, credit cards charge that much on outstanding balances each year. A monthly rate of 25% equals 300% APR. On a title loan of $500, you’d have to repay $625 by the due date, plus any other applicable fees. If you don’t, the lender has the right to repossess your car, even if it’s worth more than what you owe them.

“Well, now you’re out the money and the high interest and you don’t have a car,” Pisano says. “Now you might not have a way to get to work to get income, that’s the biggest risk.”

In some cases you may be able to avoid having your car taken away by rolling over your balance into a new title loan with additional fees. However, this can lead to a debt spiral wherein your balance grows much faster than you can afford to pay it off.

Data from June 2019 published by the Consumer Financial Protection Bureau (CFPB) shows that eight in 10 people who took out a car title loan in the previous six months still owed money, suggesting they rolled over their balance or borrowed again. That’s more than the number of borrowers who still owed money on payday loans, pawn loans, and credit cards.

“Even in states where title loans are legal, consumers still need to look out for themselves,” Ochoa says. “And If they suspect any deceptive trade practices are going on, there is recourse for that through federal or state laws.”

Pros and cons of title loans

There aren’t many upsides to title loans, but they may work as a short-term solution for someone in a bind. Here are two primary advantages.

Pros

  • Quick access to cash: Most title loan companies will approve an application and disburse the loan within days.
  • No credit check: Borrowers with poor credit (a FICO score of 600 or less) often have difficulty getting approved for less expensive and more mainstream borrowing products, such as personal loans or credit cards. Title loan companies don’t have to rely on your track record with repayments, since they know they’ll be repaid in the end, whether the money comes from your pocket or the sale of your car.

Title loans are full of potential financial traps. Here are the main dangers to be aware of. 

Cons

  • Potential to lose your car: A title loan is typically only worth a fraction of the value of your car. But if you don’t repay what you owe, you stand to lose the vehicle entirely.
  • High interest charges: Title loans have markedly higher interest rates than credit cards and personal loans. These charges can add up significantly if you opt to roll over an unpaid title loan into a new one.
  • Short repayment period: There isn’t much wiggle room in the repayment schedule for a title loan. Typically you only have a few weeks to come up with the amount of money you borrowed, plus interest.
  • Requires outright ownership: Even if you are comfortable putting up your car as collateral, you won’t be approved for a title loan unless you own your car outright. If you have an outstanding loan on your car, chances are that lender won’t willingly hand the title over to a title loan company.

Other options

Title loans aren’t your only option for fast cash, even if you have poor credit. If you’re in need of money to pay outstanding debt or a high-priority expense, try asking the lender or company for more time to pay, says Pisano. For example, say [hotlink ignore=true]energy costs are up and your home’s heating bill is putting major pressure on your budget. 

“Maybe call up the heating company first and say, Look, you know, we’re in tough times. What do you guys offer your customers?” Pisano says. 

If that doesn’t work, here are some alternatives to consider:

A credit card. A credit card lets you tap a line of credit as you need it. If you pay off your balance each month, you won’t owe any interest. If you carry a balance, interest will accrue, but rates are far lower than what you’d see on title loans. Credit card APRs range from the mid-to-high teens to the mid-20s. A person with a lower credit score might see an annual rate around 25% or higher, whereas someone with an excellent credit score could see an annual rate around 15%.

A personal loan. These loans, which can be either secured by collateral or not, let you borrow a fixed amount of money at a fixed interest rate. Payments are due monthly over a long repayment period, typically a year or more. Online lenders tend to approve personal loan applications quickly, disbursing money within a day, while the process with a legacy bank or credit union could take a few weeks. While fees do apply, they’re often more manageable since they’re spread out over a longer term. Interest rates are more comparable to credit cards than title loans.

A payday alternative loan. Some federal credit unions offer a less expensive alternative to a payday loan, referred to as a PAL. One type of PAL extends loans of $200 to $1,000 at a time to credit union members with a repayment term of one to six months. The second type of PAL offers loans of up to $2,000 with a 12-month repayment period. On either type of loan, the APR can’t be more than 28% and the application fee can’t be more than $20.

Borrow from friends or family. Turning to a friend or relative in a time of need may put you in a better financial position long-term than a title loan or other loan product would, since they’re unlikely to tack on interest or exorbitant fees. Still, it’s best to get any agreement in writing, and consider bringing in a third party to act as a witness.

Frequently asked questions

What is the difference between a title loan and a personal loan?

A title loan uses collateral (your car) to secure the loan. In order to get the title to your car back, you have to repay the loan principal in full, plus interest and fees, usually within 30 days. However, a title loan doesn’t require a credit check for approval. A personal loan requires a credit check but gives you much more time to repay the loan in fixed installments. And interest rates, even for people with poor credit, are typically a fraction of what they are on title loans. 

What is the most common type of title loan?

A car title loan is most common, but title loans can also be taken out on motorcycles, trucks, and recreational vehicles. These are collectively referred to as auto title loans. Most lenders require the borrower to own their vehicle outright to be approved for a title loan.

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