Car-title loans trigger a caution light

2 min read

All loans come with risks if they’re not repaid on time. But a car title loan, which uses the vehicle you own as collateral for a high-interest payout, could carry an especially high risk: losing your car.

While a car title loan might make sense for someone who needs immediate access to a big chunk of cash, the considerable drawbacks should give pause to most potential customers.

What is a car title loan?

In most cases, you need to own your vehicle outright to qualify for a car title loan (these loans also can be available for motorcycles, boats and recreational vehicles). While some lenders will offer loans if a car is still being paid off, most require the owner to hold the title with no debts attached to the vehicle. Consumers typically can borrow just one-quarter to one-half of the car’s worth. Add to that exorbitant interest (annual percentage rates can exceed 300 percent) and a short window for repayment (sometimes as little as 30 days), and car title loans become a risky option.

When securing a loan, prepare to show the lender a clear title and provide proof of insurance and a photo ID. Some lenders ask for a second set of keys—the faster to repossess your car should you fail to repay the loan on time. Others even require GPS devices to track the location of the car or devices to prevent ignition without the right numeric code.

Car title loans come in a couple different varieties. Some are single-payment, meaning that the borrowers have to make good on the full amount of the loan within a month or so. Installment loans, with similarly high APRs, can be paid back over three or six months, depending on the lender.

Need to finance a new car? We’ve got a great selection of auto loans to choose from.

Is a car title loan right for you?

If you decide a car title loan is worth pursuing, here are some key considerations to think about before you sign on the dotted line. First, make sure you understand the terms of the loan. Title lenders are required to show them to you in writing before signing, and federal law requires that they be honest and upfront about the total cost of the loan.

In particular, look at the interest rate on the loan: Lenders often charge 25 percent each month in financing charges. On a $2,000 loan, that interest would cost an additional $500 if the loan is repaid in 30 days.

Car title loans can be paid back numerous ways: in person at the location where the loan originated, online or via automated systems that allow lenders to take payment from a bank account or special debit card.

For those who can’t settle up in the prescribed period, lenders may sometimes allow a so-called “rollover” into a second loan – but that’s another area for concern, as fees and interest are added to the unpaid amount and could quickly get out of hand.

Use this auto loan payment calculator to see how much you’d save by paying off your conventional car loan early.

Where to find a car title loan

Car title loans can be acquired by applying online, or in person at a brick-and-mortar storefront. Either way, you’ll need to provide your picture identification and proof that you hold your vehicle’s title.

If the loan is approved, you’ll get the money and the lender keeps the title to your automobile. If the principal and fees are repaid within the 30-day or rollover window, you get your title back. If not, the lender takes possession of your vehicle. While some states require lenders that have repossessed and sold borrowers’ vehicles to pay back the difference between the sale price and the loan amount, others do not.