Thinking about taking out a car title loan?
Payday loans secured by your car title are easy to qualify for. A new title loan could be set up and funded in a day, with no credit check and no income verification required.
But there’s one problem with this seemingly simple money solution…
Getting a title loan is a high risk decision.
Almost all borrowers are shocked to learn the full cost of this product after the fact. 5.2% of consumers used auto title loans in 2024, up from 3.7% the year before.Auto title loans are on the rise.
In this comprehensive guide, I’m going to lay out everything you need to know about title loans so you can make an informed choice.
Here’s a breakdown of what we’re going to cover…
- Definition Of A Car Title Loan
- Reasons You Should Avoid Title Loans
- Exceptions To The Rule
- Steps To Take If You Have A Title Loan
- Title Loan Alternatives That Are Better Than Losing Your Car
Title Loans Explained
At first glance, car title loans are a no-brainer.
You give your vehicle title to a lender as collateral for a loan. They’ll loan you between 25% and 50% of your vehicle’s value in cash. In exchange, you get 15 to 30 days to repay.
It’s a short term loan that many cash-strapped borrowers can afford to repay without issue.
Bingo!
Not quite…
The tricky part about title loans is that they vary in their specific terms by state. Florida car title loans work differently than in say California or Texas, for example. Always research the laws in your state before agreeing to a loan.
The most important detail of a car title loan is this: The lender can repossess your vehicle if you don’t repay the loan in full on time.
The Sneaky Truth About Title Loans
The low down on car title loans…
Companies advertise headline rates that have nothing to do with the actual annual percentage rate (APR) of the loan. Let’s run some numbers so you can see how much a car title loan will actually cost:
- Average APR = 300% — Car title loans have a ridiculously high annual percentage rate, at an average of 300 percent.
- Rollover fees — If you can’t repay the loan by the due date, the loan is rolled over and more fees are added on.
- Repo fees — If the lender repossesses your vehicle, you pay towing and storage fees as well.
Say you borrow $1,000 using your car title as collateral. On average, you’ll pay $250 in fees for that 30 day loan. That’s 25% of the original loan in one month.
Research from the Consumer Financial Protection Bureau shows that 1 in 5 borrowers end up having their vehicle repossessed.
One in five car title borrowers lose their car.
The Rollover Trap
Now it’s time for the part I hate the most…
About 80% of car title loans are rolled over. A rollover occurs when the borrower can’t repay the loan at maturity and the lender agrees to extend the loan term.
Each rollover adds another set of fees and interest charges on top of what’s already owed. Before you know it, that $1,000 loan now costs $2,000 or more.
The Rare Situations When Title Loans Are Acceptable
Full disclosure…
Title loans almost never make sense. There are a few exceptions though:
- Medical emergencies — If you need cash for unexpected medical bills and no other options are available, a car title loan might be a reasonable short-term solution.
- Avoid eviction — If a title loan helps you keep your housing (where you live is likely more important than your car), then it’s a decent option.
- Essential car repairs — If your vehicle is needed for work and nothing else will do.
Even in those scenarios, be prepared to pay off the loan and fees within the loan term.
The Final Reality Check
Take a moment to ask yourself this question: “Is it realistic to expect that I can repay this loan, with interest and fees, within 30 days or less?”
If you have to think too hard to answer that question, a title loan is not for you.
Title Loan Alternatives: Options That Are Better Than Losing Your Car
Hold on a minute before you do anything rash…
There are always other choices besides a car title loan. Let’s look at a few of the better alternatives…
Personal Loan
Credit unions offer “payday alternative loans” with rates as low as 28%. That’s a long way from 300%.
Getting a personal loan from a credit union with bad credit is still cheaper than a title loan.
Credit Card Cash Advance
Credit card cash advances are more expensive than most people realize.
The average APR can hit 30% or more. Most cards also charge additional fees when you get a cash advance.
But that’s still 30% compared to 300%. A credit card cash advance won’t get your car repossessed if you can’t repay it quickly.
Negotiate With Creditors
This is the tip most people ignore…
Call the company or person you owe money to. Explain that you are having trouble making ends meet right now. Many creditors are willing to set up a repayment plan if you are honest about your situation.
Sell Your Vehicle
If you’re upside down in your car payments, selling the vehicle could be a way out. You can use the proceeds from the sale to pay off your auto loan and buy something cheaper.
It’s better than having your vehicle repossessed and still owing money.
What To Do If You Have An Existing Title Loan
Have a car title loan already? Don’t panic but don’t waste time either…
The first step is to find out if your state allows a right to cure period. This is a grace period that lenders have to give borrowers to pay off the loan and bring it back current.
Second, try to refinance the loan with another lender. Some title loan companies will refinance your existing loan at a lower rate.
Third, borrow money from a family member or friend to pay off the title loan.
Sell assets or hold a garage sale to come up with the money to get out of the loan. It’s not ideal but better than losing your car.
Know Your Consumer Rights
Federal law requires that all terms of the title loan are put in writing and shown to the borrower before the loan closes. There can be no verbal side agreements or “fine print.”
Walk away from any lender who doesn’t disclose all terms and the true annual percentage rate in writing.
Closing Thoughts On Car Title Loans
Car title loans are a high-risk financial product that only makes sense for a narrow subset of borrowers.
Statistically, the majority of borrowers will either repeatedly roll over the loan or have the vehicle repossessed. The fees associated with these loans are incredibly high relative to other options.
Before you put your car up as collateral for a loan, try every other option first. Your vehicle is likely one of your biggest assets. It gets you to work and enables you to earn an income.
Don’t put your car at risk unless you truly have no other option.
If you do decide to take out a title loan, make sure you have a solid repayment plan before you sign the loan documents.