How Do Title Loans Work? Here Are 16 Better Options

Title loans are a type of short-term loan that can trap borrowers in a cycle of debt and even result in them getting their car repossessed. If you’re in need of quick cash, consider these alternatives instead.

What Is A Car Title Loan?

A car title loan is a short-term loan (usually 30 days) where the borrower puts their vehicle down as collateral. Title loans are similar to payday loans in that they both have high APRs and are typically predatory in nature.

This type of secure loan means that in exchange for your vehicle, lenders will give you a certain loan amount. The lender will keep the vehicle title until you’ve paid off your loan. Title loans don’t have a credit check, so your credit score will not matter. The application process is quick and borrowers are usually allowed to keep driving their vehicle. However, like payday loans, title loans are designed to trap you in a cycle of debt where, in this case, you could end up losing your vehicle.

How Do Car Title Loans Work?

The value of your vehicle determines how much you can borrow from a title loan. According to the Federal Trade Commission, this usually ends up being 25-50% of the value. The average title loan agreement ranges from $100 to $5500, while some lenders might let you borrow as much as $10,000.

The lender keeps the title of your car until the loan has been repaid. Loan terms normally last only about a month or two but some can be as long as a year. Sometimes lenders install GPS tracking devices on your vehicles so they know where it is at all times. If you are unable to repay the loan, this is how your vehicle could be located and repossessed.

16 Loan Options to Avoid Title Loans

Title loans may be tempting as a quick way to access cash fast, but there are other options and types of loans to consider:

Use A Credit Card Cash Advance

A cash advance is a service that allows cardholders to withdraw cash based on their credit limit. Credit cards have lower interest rates than title loans. And usually, if you can pay the full amount when your credit card bill is due — about the same 30 days that you’d get with a title loan — you won’t pay much interest.

Apply For An Unsecured Personal Loan

You can apply for a personal loan at any bank or credit union. These don’t require collateral and have lower interest rates. Monthly payments can be more manageable because the loan term is longer.

Alternatively, if you have assets that can be used as collateral, you can also apply for a secured loan.

Apply for a Payday Alternative Loan

Payday alternative loans (PALs) are essentially payday loans with one key difference – they are loaned out by federal credit unions instead of predatory lenders. This makes them much more favorable as there is zero risk of being scammed, better loan terms, and more flexible repayment periods. The annual percentage rate is capped at 28% and the loan amount must be between $200-$1000.

Are You Owed a Tax Refund?

The chunk of change you can receive from a tax refund could be put towards your title loan. According to The Pew Charitable Trusts, 21% of title loan borrowers used a tax refund to pay off a title loan.

Borrow Money from Family and Friends

Borrowing money from friends and family can be uncomfortable, but it’s worth it to avoid taking out, or rolling over, a title loan. Setting a clear repayment plan can be a good strategy to avoid any potential issues. The popular payment service Venmo offers ways to borrow, simplifying the process of borrowing from those you know. In a Pew study, 19% of borrowers got help from friends and family to pay off their title loans.

Peer-to-Peer Lending

Peer-to-peer lending sites like Lending Club, Peerform, and Upstart provide loans up to $40,000 for borrowers. However, most of these sites require a minimum 600 credit score or higher along with other qualifications.

Borrowing on the social media site Reddit is another type of peer-to-peer option. By going to the subreddit r/borrow, you can make a post outlining how much you want to borrow, how the money will be spent, and how much you’ll repay the lender. Most of these loans are under $1000 but there are cases where the loan amount is much higher.

Bad Credit Loans

Bad credit loans are a type of loan for borrowers with low credit scores or no credit at all. They act as traditional personal loans to help you in a financial emergency with a much higher interest rate due to the borrower’s credit standing. Online lenders like Upstart and Avant are favorable to borrowers with bad credit.

Take on a Side Hustle

Picking up a side hustle, such as delivering food for DoorDash or driving for Uber can be a good way to earn some fast cash to help pay off your title loan.

Negotiate

If you think you’ll be unable to pay back your lender, reach out and try to negotiate a more manageable repayment plan. Lenders with title loans tend to give some leeway for a missed payment, so don’t expect your car to get towed away the next day.

You can also try negotiating with other lenders if you built up credit card debt that is taking away payments from your title loan. Credit card companies might be willing to help you or give you an extension.

Credit Counseling

In order to come up with a financial game plan for repaying your loan (and managing money in the future), consider visiting a credit counselor. Nonprofit credit counseling agencies can help you develop a debt management plan (DMP) that rolls all of your loans together into a single debt with a lower interest rate. The Federal Trade Commission (FTC) offers some good guidelines to take advantage of when choosing a credit counselor.

Cash Advance Apps

Cash advance apps can enable borrowers to take out a loan all from the palm of their hand. These apps don’t charge interest, instead relying on “tips” from borrowers or a monthly subscription fee. A few of the top lenders for this service include Dave, Moneylion, and Brigit.

On-Demand Pay Provider

If your employer participates in a platform like DailyPay, you can get access to your earned wages before payday. This can be a good method if you need your money as soon as possible to pay off your loan. Other platforms include Gusto, Paychex, and Paylocity.

Social Services or Charities

Reach out to social services or charities where you live as they may be able to help you with your loan or vehicle situation.

Pawn Shop Loans

To get a loan from a pawn shop, you must bring an item in as collateral. After the pawnbroker determines the value of the item, they’ll give you a loan based on its cost. They will hold onto the item until you’ve paid off the loan. Pawn shops typically won’t do credit checks, so it is one method to get a loan with bad to no credit.

Lending Circles

A lending circle is where a group of friends or family pool a specific amount of money into a fund that goes to one member of the group at a time. This typically works in a rotating fashion so that throughout a given year, all members get an equal takeaway. The funds can also be allocated to a specific group member in dire need.

Sell Some of Your Unused Items

One way to make quick cash can be to sell some of your unused items on popular marketplace sites like eBay, Craigslist, or LetGo.

The Problems with Title Loans

Title loans are full of problems that make them bad ideas for borrowers, including:

They’re Expensive

Title loans can lead to a cycle of debt that can cause borrowers to owe more in interest than what the original loan amount was. For example, say you have a $5000 car title to be repaid in 24 monthly installments with an APR of 108%. Over the course of the loan with monthly compounding, you will end up paying $7362.71 in interest on top of the $5000 principal. Not to mention any fees that might get tacked on.

You Could End Up Losing Your Car

Probably the worst part about entering into a title loan agreement is that you could end up losing your vehicle. A Consumer Finance Protection Bureau study found that, for borrowers who roll over their title loans, one in every five loans ends with the car being repossessed.

They Aren’t Much Different Than Payday Loans

In both cases, the cost of the loan is high. Both types of loans target borrowers with bad credit and who may not have a lot of financial knowledge. Both have very high interest rates and repayment is difficult, forcing many borrowers to roll them over into new loans. One key difference is that payday loans have a very short term. The due date is usually about two weeks. The other key difference is that if you don’t make loan payments on a payday loan, your account will be passed on to a debt collector. If you don’t repay your title loan, your car will be repossessed. Repossession can leave you in an even worse spot if you can’t get to work to earn money.

Still want to know more about the problems with title loans? Watch this video:

What Do I Need To Qualify For An Auto Title Loan?

To qualify for an auto title loan, only a few documents are needed. They are:

Photo ID

The first thing you’ll need is a government-issued photo ID. This includes a driver’s license, state ID, military ID, and passport.

Proof of Residence

You must be able to show you reside in your current state. Credit card statements, an apartment lease, phone bill, utility bill, etc. should work.

Proof of Income

You must demonstrate that you have the ability to pay the loan. Pay stubs, bank account statements, invoices, tax returns, etc., will work.

A Clear Title

Because the car title is used as collateral for the title loan, it will have to be in your name. Many title lenders require the car to be lien-free (fully paid off), but a few lenders offer what’s known as a second-lien title loan, which allows you to apply for a title loan even if you don’t have a clear, lien-free title.

Vehicle Inspection

The lender will need to check out your vehicle to assess its value.

Are Title Loans Legal?

Title loans are only legal in some states. These are Alabama, Arizona, Delaware, Georgia, Idaho, Illinois, Texas, Mississippi, Missouri, Nevada, New Mexico, South Dakota, Tennessee, Utah, Virginia, and Wisconsin.

In some states, they are completely illegal. For example, in Michigan, it’s illegal for a lender to take physical possession of the borrower’s original title when a loan is issued.

Title loans are allowed in some other states because of loopholes in their laws. For example, in California, the interest rate on title loans is capped for loans up to $2,500, so lenders typically require a minimum loan amount of more than $2,500. This allows the lender to charge a higher interest rate.

Be sure that you check the laws in your state before you apply for any title loan.

Can I Refinance an Existing Title Loan?

Yes, you can refinance your existing title loan either with the same lender or with a new lender with potentially more favorable terms. However, be wary of doing so. Predatory lenders could look to trap you in a debt cycle themselves once you refinance with them. Perform your due diligence by reading over any documentation you sign when it comes to refinancing.

The Bottom Line

Title loans are a dangerous type of loan that should be avoided at all costs. Instead, consider the options above if you are in need of cash, or as avenues to help pay off your existing title loan.

FAQs

Do Title Loans Work to Help Build Good Credit?

In most cases, title loans won’t have an impact on your credit score. This is because lenders typically won’t run a credit check when you apply for one.

Is There a Minimum Loan Amount for a Title Loan?

Typically no, however, if you are using a title loan for only a small sum, consider other loan options.

What Happens To Your Title Loan If Your Car Is Repossessed?

If your car is repossessed, this means you defaulted on your title loan. Laws vary state to state but in some states, the lender must give you 20 days after your vehicle was repossessed to pay the amount you owe back in order to get your vehicle back. Keep in mind that lenders can only re-sell your vehicle for a commercially reasonable price.

Does a Title Loan Repossession Go on Your Credit Report?

This depends. If your credit was run during the title loan application process, there’s a chance a repossession will end up on your credit report, thereby damaging your credit score. However, if the repossession is not reported on your credit report, then you can avoid having your credit score decrease.

What is the Difference Between Title Loan and Title Pawn?

The primary difference is that with a title pawn loan, the pawn shop takes both the title and the vehicle while you work on repaying the loan. Only after you’ve paid off the loan can you get your vehicle back.