If you need cash in a hurry, having bad credit can severely limit your options.
But with the costs and requirements associated with auto title loans, they’re not for everyone.
In this guide, you’ll learn everything you need to know about auto title loans, including what they are, how they work, pros and cons, and how to get the best interest rates.
What is an auto title loan and how do they work?
An auto title loan is a short-term loan that uses your car as collateral. They don’t require a bank account, and you can typically get more cash than you would qualify for with a payday loan.
To qualify for an auto title loan, you must have the title to the car, meaning you can’t currently have a loan out on the vehicle.
Auto title loans are expensive. According to a report by the Consumer Financial Protection Bureau (CFPB), the typical auto title loan is for $700, and it has an APR of 300% for single-payment loans or 259% for installment loans.
Most single-payment auto title loans require payment within 30 days of taking out the loan. With installment loans, however, you may have a few months to pay back the loan.
The way auto title loans work is as follows:
- You apply online or at the lender’s location.
- The lender does an appraisal of the fair market value of the vehicle and offers you a maximum loan amount based on the car’s value. For example, the lender may cap your loan at 50% of the value of the car, or some other percentage.
- You get your cash to cover your need and plan to repay the loan based on its terms.
- If you don’t repay the loan on time or miss a payment, the lender may repossess the car.
Unfortunately, on-time repayment rates are low on auto title loans. According to the above CFPB report, more than 80% of single-payment auto title loans aren’t repaid on time, with most borrowers forced to renew the loan or borrow money elsewhere to cover the debt.
Furthermore, 20% of borrowers of single-payment auto title loans end up having their car repossessed.
Are auto title loans safe?
Because of the potential issues with auto title loans, only 27 states allow auto title loans in some form or another. As of 2017, Alabama, Arizona, California, Delaware, Florida, Georgia, Idaho, Illinois, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Minnesota, Montana, Nevada, New Hampshire, New Mexico, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, and Wisconsin allow title loans.
Several Federal laws exist which mandate that the title loan company fully disclose all fees, rates, and issues before you sign”
What’s more, each state has different regulations to protect consumers from potentially predatory behavior.
For example, some states have laws that force lenders who have repossessed and sold your car to pay you the difference between the sales price and loan amount. Others have limits on the interest rates auto title lenders can charge.
“Several Federal laws exist which mandate that the title loan company fully disclose all fees, rates, and issues before you sign,” says Fred Winchar, president and owner of TMG Loan Processing. “Ask the company to explain each paragraph to you on the contract if you do not understand.”
If at any time you feel uncomfortable, Winchar recommends simply walking away. There may be several other lenders who are willing to be more upfront and honest with you.
Like any loan, auto title loans will show up on your credit report, so defaulting can have long-term credit consequences.
That said, auto title loans can be safe if you know what you’re getting yourself into. Understanding the negative consequences and properly preparing for them can help you avoid some of the dangers.
Auto title loan requirements
The eligibility requirements for auto title loans are low. Because the lender stands to gain more if you default than if you repay, you typically don’t need to meet any minimum credit score requirements.
You do, however, generally have to have some form of income to prove your ability to repay the loan.
Other typical requirements include:
- A car in driving condition
- Proof of insurance
- A clear title
- Proof of address
- A valid ID
How to get the best rate on an auto title loan
If you’re interested in getting an auto title loan, it’s important to first know whether they’re available in your state. Once you’ve checked the list above, look up several auto title lenders in your area to see which offers the best rates.
Your best option is to go with a lender who allows installment loans, as those typically give you longer to repay the loan and at a lower interest rate.
Auto title loans pros and cons
Compare the pros and cons to make a better decision.
- Anyone can qualify
- Quick funding.
- You keep the car
- Very high APRs
- You could lose the car
- You might need to up your insurance
Depending on your needs, an auto title loan has the following benefits:
- Anyone can qualify: Auto title lenders sometimes don’t even run a credit check because they’re using your car as collateral. So, if you’ve exhausted all your other options, you just need a working car.
- Quick funding: Auto title lenders can usually get you your cash within 24 hours, either with a check or a direct deposit into your checking account.
- You keep the car: Although the lender is using your car as collateral on the loan, you get to continue driving it while you’re paying it back.
There are some drawbacks that you need to know before you start looking for a loan:
- Very high APRs: Even if you shop around and compare several lenders to get the best rate available, it’s still going to be high.
- You could lose the car: If you default on your loan, you have two options: lose your car or borrow again to repay the loan. According to the CFPB report, more than two-thirds of auto title loans were taken out by borrowers who reborrow six or more times.
- You might need to up your insurance: Since your car is collateral for the loan, the lender could lose its investment if you get in an accident. As a result, the lender may require that you meet certain minimum insurance standards before you can borrow.
Auto title loan alternatives
If you need cash now, an auto title loan should be your last resort. “You must consider if your bank can loan the money to you, your family, your friends, your credit union, and your credit cards,” says Winchar.
Also, consider selling some personal items to get the cash you need, or at least lower the amount you’ll need with an auto title loan.
If you’re a member of a local credit union, see if they offer what’s called payday alternative loans. These loans are regulated and come with a maximum APR of 28%, so they are much more beneficial to consumers with bad credit.
If your credit is good enough to qualify for a personal loan, the interest rate you’ll get will be high, but not as high as with an auto title loan.
In fact, you can use SuperMoney’s personal loan engine to see if you can pre-qualify for a personal loan without a hard credit check.
Even payday loans may be preferable to auto title loans, simply because defaulting won’t result in losing your car.
Should you get an auto title loan?
If you’ve tried all your other options, an auto title loan might be your last chance to get the cash you need.
Even so, Winchar recommends getting one only “if you are absolutely positive you can pay off the loan in 90 days or less. If you cannot pay off the full amount plus interest back to the title loan company, it starts working against you.”
If you’re confident you’ll be able to pay off the loan, compare lenders to get the best terms. But before you apply, consider whether you actually need the money or if it can wait until your next payday.
Taking a little extra time to consider your needs and other options can save you money in the long run.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.