How Do Title Loans Work?

When unexpected bills come up, or you find yourself in a pinch on regular bills, your first instinct is usually to find the cash you need as quickly as possible. Title loans can be an easy way of getting fast cash from lenders, typically to cover those emergency expenses or cover for other short-term financial needs. These loans are secured loans where the vehicle title acts as the collateral, and the title is given back to you once the loan is repaid in full.

What Is a Title Loan?

A title loan is a short-term loan similar to a payday loan. You give the title of your vehicle to the lender, who then keeps it until the loan is fully repaid. Since the title acts as collateral, there are typically few or no credit requirements and the application process usually takes less than an hour.

There are a few different factors that determine how much you can borrow, including who the lender is, the value of your vehicle, and where you live.

Many states no longer allow car title loans. The list of states that do allow them includes:

  • Alabama
  • Arizona
  • Delaware
  • Georgia
  • Idaho
  • Illinois
  • Mississippi
  • Missouri
  • Nevada
  • New Mexico
  • South Dakota
  • Tennessee
  • Texas
  • Utah
  • Virginia
  • Wisconsin

California, South Carolina, Kansas, New Hampshire and Louisiana also allow title loans but have stricter laws and regulations governing them.

How Do Title Loans Work?

To secure a title loan, you’ll need to apply either in-person with the lender or online. Most lenders will require you to own the vehicle outright and that it can’t be financed by another institution. You’ll also need to have a few things in hand to get approved for the loan, including:

  • The Vehicle
  • The Title
  • A Photo ID
  • Proof of Insurance

Some lenders will also require you to provide them with a spare key.

The amount you’ll be able to get will typically range from 25% to 50% of the vehicle’s value. Most lenders don’t require a credit check or proof of income, but if they do, it can impact the total value of the loan.

The repayment period usually ranges from 15-30 days but maybe longer with some lenders. You’ll find that most lenders require the payment to be made as a lump sum and won’t accept installment payments. These payments can usually be made in person, online, or through an automatic withdrawal.

You won’t need to turn the car over to the lender to secure your loan. You can continue to use it as you normally would, but the lender may place a GPS tracking device on your car to help them locate it if they need to repossess it.

What Happens If the Loan isn’t Repaid?

If you don’t pay the loan back on time, the lender can repossess your vehicle. According to a report from the Consumer Financial Protection Bureau, nearly 20% of all title loans result in repossession. Even if you’ve made partial payments but fall behind, lenders are allowed to repossess the vehicle. And once it’s in their possession they may sell it to get back what they’re owed.

The laws regarding the sale of repossessed cars vary by state. In some states, the lender is required to pay you the difference between the selling price and what you owe on the loan, but in other states, they are allowed to keep the full sale amount.

If you’re unable to repay your loan in full by the end of the repayment period, a lender may allow you to rollover the loan, giving you more time to make the payments. While this will prevent your car from being repossessed, you’ll pay even more in interest and fees.

How Much Does a Title Loan Cost?

Car title loans are expensive. The interest rate is typically around 25% per month, which translates to an APR of 300%. There are also usually monthly fees associated with the loans, making them cost even more.

These high fees and interest rates can make a tight financial situation even worse, leading to a cycle of debt. On average, lenders pay more in interest and fees than the actual amount of money they borrow. According to a report from the Pew Charitable Trusts, the average title loan is for $1,000, but the average lender pays $1,200 in fees alone.

Do Title Loans Impact Credit Scores?

Typically, title loans do not impact credit scores. Since lenders often don’t pull your credit to approve the loan, there’s typically no hard inquiry affecting your score. Note that while most do not check your credit, they still may and sometimes do, depending on their lending practices.

Lenders also don’t report your payment activity to the credit bureaus. This means that you won’t be able to use a title loan to help build your payment history since on-time payments won’t appear on your report. And because the lender usually repossesses your vehicle and sells it if you cannot make your payments, they don’t have a need to send your debt to collections.

Title Loan Alternatives

If you need immediate cash, a title loan may be a tempting offer. However, there are plenty of alternatives that can help you get the cash you need without such steep fees. Title pawns are another way to get cash quickly using your vehicle as collateral. However, with a title pawn, you must surrender the vehicle itself to the lender to secure your loan.

Here are a few additional options to consider:

  • Request an Extension: If you’re considering a title loan because you’re behind on your payments with another creditor, get in touch with them and ask about a possible extension. If you’re in good standing with them and they believe it’s a temporary situation, they might grant you an extension, which will help you avoid late fees and gather the necessary funds by your new due date.
  • Negotiate Debt: If you’re unable to make the minimum monthly payment on one of your credit cards, you should consider calling the creditor to negotiate your debt. Depending on your situation, there are often several options available, including lower monthly payments, reduced interest rates, lump-sum settlements, and hardship plans.
  • Credit Cards: Using your credit card to pay a bill might be a cheaper option than a title loan. Interest rates on car title loans are often much higher than they are with credit cards, and you’ll have a longer period of time to pay off the full amount.
  • Personal Loans: While they will require a credit check and proof of income, an unsecured personal loan will generally have a lower interest rate and an extended repayment period. They also don’t require collateral, so you won’t have to risk losing your vehicle.
  • Credit Card Cash Advance: If you have a credit card but need cash, you may be able to get a cash advance at an ATM. Depending on your credit card company, you might be charged an upfront fee and pay a higher interest rate, but those costs will likely still be less than those of a title loan.
  • Borrow from Friends or Family: Asking for money from family and friends can be an uncomfortable situation, but the people you trust may be willing to help you out of a difficult financial situation. If you decide to do this, be sure to write up an official contract to avoid straining the relationship later on.
  • Military Assistance: Service members and their dependents may be eligible to receive funds from military aid societies. Army Emergency Relief, Air Force Aid Society, Navy and Marine Corps Relief Society, and the Coast Guard Mutual Aid are among the various options.
  • Cut Spending: Before borrowing money, examine your budget to see if there’s any way to cut expenses. While making sacrifices isn’t always a pleasant option, it can help you get your finances back on track and save money in the long run.
  • Generate Extra Income: Taking on a temporary job can help you generate the money you need to get through tough financial situations. If you’re able to take on some extra hours, you’ll be earning more money and avoiding the interest and fees associated with borrowing.

Title Loans for Military Members

There are special regulations in effect for military members who apply for a title loan under the Military Lending Act. These protections include:

  • A maximum APR of 36% on title loans with terms fewer than 181 days,
  • No mandatory arbitration,
  • No unreasonable legal notices,
  • Lenders cannot use a check or access a bank account to approve the loan, and
  • Disclosures regarding borrower’s rights and loan costs must be provided

If the lender does not follow these regulations the title loan is considered void. While these protections can help military members avoid some troubling situations, the loans are still much more expensive than other alternatives, and the lender still has the right to repossess the vehicle if payments aren’t made.

The Bottom Line

If you’re in need of fast cash, a title loan can be a tempting and simple way of obtaining it. However, the high fees and interest rate can leave you in an even more stressful financial situation than you were in before. It’s best to consider your other options before you decide to use a title loan.

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