Title Loans: What You Need to Know

Car title loans are designed for people who need cash fast, whether to cover an emergency expense, pay essential bills or manage debt. Some lenders don't run a credit check and may not even require proof of employment or income, making auto title loans easy to access, even for consumers with a troubled credit history.

But as with many other loans that are accessible to consumers with bad credit, the appeal of these cash loans is overshadowed by their steep costs and harsh consequences if you can't repay what you owe.

What Is a Title Loan?

A title loan offers short-term financing to borrowers who own their car outright or have significant equity in it. Lenders use your vehicle's title – a document that proves you own your car – as collateral for the loan and typically require payment within 15 or 30 days.

With such a short repayment term, auto title loans are an expensive form of credit, and even the best car title loans can charge triple-digit annual percentage rates.

"Title loans often fall into the category that many lenders consider as predatory lending," says James Garvey, CEO and co-founder of Self Lender, which offers credit-builder loans.

If you can't manage to repay the debt on time, you may have the option to roll your existing title loan into a new one. But if not, the lender can seize your vehicle and sell it to get back what you owe.

Only 16 states permit auto title loans with triple-digit interest rates, and in six more, auto title lenders take advantage of legal loopholes to skirt outright bans, according to the Consumer Federation of America.

How Do Title Loans Work?

Lenders may offer title loans online or through a physical location. You'll fill out an application to apply. If you're not already at a brick-and-mortar location, you'll need to visit one to present your car.

You'll also need to provide a clear title – though some lenders don't even require this – a photo ID, proof of insurance and any other documents the specific lender may need. You may also need to give the lender a second set of car keys. That said, you'll keep your car during the repayment process.

"The borrower just has to walk in with the title and driver's license and sign a few papers," says Sonia Steinway, CEO and co-founder of Outside Financial, an online platform that offers resources on auto financing options and connects consumers with lenders. "The borrower then walks away with a check, direct deposit or MoneyGram. The whole process can take less than 30 minutes."

You can typically borrow between 25% and 50% of the value of your car. Loans can range from $100 to $10,000, depending on the lender. You'll repay what you owe either in person, online or by automatic payment from your checking account.

Interest rates on auto title loans can be extremely high. Lenders may assess a finance charge that includes both interest and fees, and the charge can amount to up to 25% of the loan.

So, for instance, let's say you borrow $800 and the finance charge is 25% of the loan amount, or $200. If the loan is due within 30 days, your APR is roughly 304%. That's far more than what you'll pay even with some bad credit personal loans.

If you can't pay back what you owe, the lender may offer to roll over your existing loan into a new title loan. Doing this, however, will add even more fees and interest to what you already owe and can make it even harder to pay back.

If you continue the cycle, you could end up with multiple title loans, effectively stacked on top of each other. And if you or the lender end your loan before it's fully repaid, the lender will likely repossess your car to recoup the amount you owe. Some lenders even require you to install a GPS device so they can easily locate your vehicle for repossession.

Why It's Important to Think Twice About a Title Loan

Given how title loans work, borrowing money this way could cause more problems than it solves.

You could lose your car. The worst-case scenario with a car title loan is that you can't repay the debt and the lender seizes your car. According to a 2016 report by the Consumer Financial Protection Bureau, this happens to 20% of people who take out title loans.

Losing your car could mean you can't drive to work, pick up your kids from school or get somewhere in an emergency.

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