Car Title Loans: What You Get and What You Pay

Handing Over Keys
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Car title loans offer many people a way to quickly get a short-term loan, but they’re generally very costly. To get an auto title loan, you’ll need to pledge your vehicle as collateral by handing over the title to the lender until the loan is completely repaid.

If you’ve got no other options—for example, you might need funds right away for emergency medical treatment—a title loan could make sense. In most cases, though, they end up being more expensive than they’re worth, and you've put yourself at risk of losing your car. 

How Car Title Loans Work

To borrow against your vehicle, you need to have at least some equity in your car. In many cases, you need to have paid off any other loans used to purchase the vehicle, but some lenders allow you to borrow if you’re still paying off a standard auto purchase loan. On average, these loans can range from $100 to $5,500.

The amount you can borrow is based on the value of your car or the equity you have in the vehicle. The greater the value, the more you can borrow, but don’t expect to squeeze the car's full value out of a title loan. Lenders want to make it easy on themselves to get their money back, so they’ll lend only what they can quickly and easily get for the car if they have to repossess and sell the vehicle. Most lenders will give you a loan for between 25 and 50 percent of your car's value. They may also install a GPS tracking device on your car, in case you're thinking of hiding the car instead of paying off the loan.

Paying the Loan

Title loans are short-term loans, often due within 15 to 30 days. That means you have to quickly come up with the funds for a complete repayment, known as a balloon payment, and that’s rarely as easy as you’d hope. In some cases, you can extend repayment by “rolling over” the loan.

Instead of paying the loan off, you get a brand new 30-day loan. However, rolling over becomes an extremely expensive way to borrow because you have to pay new loan fees every time you do it. State laws sometimes limit whether rolling over is an option.

You may find that your lender is charging you 25 percent interest for one month, which may not sound that bad. However, if you were to carry that loan for a full year, the annual percentage rate (APR) of interest actually equates to about 300 percent.

Costs are high with title loans. Lenders generally charge higher interest rates than you’d pay on credit cards. State laws often limit interest rates, but those limits are still quite high. What’s more, you typically have to pay fees to get a title loan, and those fees increase your cost of borrowing. Even if the fee isn’t called “interest,” you’re still paying it because the lender's included it in the balance of your loan. Like payday loans, title loans can lead to you repaying several times what you borrowed, which adds up to a very significant amount of loan interest.

Losing Your Car

One of the biggest problems with title loans is the risk of losing your car. If you’re unable to keep up with payments, the lender can take possession of the car, sell it, and keep its share of the money, which could be the total value for which the car sold.

If your car is repossessed, things could go downhill quickly. You might not be able to get to work and continue earning an income, or getting to work and back will take substantially longer. This will impact your quality of life, as it will be more difficult for you and your family to complete daily tasks such as shopping and getting to school. If you don’t have to put your car on the line, don’t do it.

Alternatives

Before you get a title loan, make sure you’ve tried everything else. These options might not be appealing, but they might be better options.

  • A personal loan is your best option if you must borrow. Ask your bank or a credit union about borrowing with a longer-term loan at better rates.
  • Credit cards are rarely a smart way to borrow, but they are unsecured loans that don’t carry the risk of repossession.
  • Extra income might also get you through a rough spot. If you can take on another job, even temporarily, you will most likely come out ahead. The extra work might not be not pleasant, and it might not even be possible, but it’s worth evaluating.
  • Cutting costs is easier said than done, but if temporary sacrifices can get you over a rough patch unscathed, that’s probably a better option.
  • Downgrade your car, if you have a more expensive car than you need. You might be able to drum up cash by selling that car, buying something less expensive, and keeping the difference.

If you must seriously consider a title loan, plan for how you'll pay it back before taking the loan so that you leave nothing to chance.