Are you in a financial jam and needing a little cash to help you get out? If your credit is subprime and you own a car, you may want to consider getting a car title loan. You can get quick access to cash in exchange for your auto title. Then, you can repay the loan within the allotted time and get your car title back. Sounds simple enough, right?
While a viable option to consider, there are a few things you should know before you hand over your car title. Here’s a look at when these loans make sense, how they work and why they have a reputation for being risky.
When does it make sense to get an auto title loan?
It makes sense to get an auto title loan when you have subprime credit, need to borrow some cash fast, car title loans offer the best terms available, and will be able to repay the loan in time. Being that the lower your credit score, the more it costs to borrow, securing a loan with your car title can potentially help you get lower interest rates than you would get on an unsecured loan. Furthermore, it may be the only type of loan you can get approved for.
To find out whether a car title loan is your best option, follow these steps.
- Research unsecured loan providers. Identify the companies that offer loans to people with subprime credit.
- Research car title loan providers and find the ones offering the best package deal in fees, APR, repayment length and other terms.
- Get quotes from the best unsecured loan providers and car title loan providers. Ensure they do a soft credit check, so your credit isn’t negatively impacted.
- Compare the quotes and choose the one that offers the best value.
If a car title loan is the best offer you get, or the only one, then it makes sense to go for it. But before you do, learn more about what they are and why they can be risky.
Car title loans explained
Here are the basics on car title loans according to the Federal Trade Commission (FTC):
Also known as title pledge loan, title pawn and pink-slip loan.
Loan type: Typically a short-term cash loan secured by a car title.
Legality: Each state decides whether car loans are authorized. Additionally, they decide the terms that are permitted and the protections a borrower has if they cannot repay the loan. Therefore, the level of risk present with car title loans will vary depending on where you live.
The Consumer Federation of America reported that as of 2016, 16 states permit car title loans at triple-digit APRs. These include Arizona, Delaware, Georgia, Illinois, Nevada, and Wisconsin. Half of those states have no cap on the APR lenders can charge.
Six more states offer car title loans through certain legal loopholes, including California, Florida, and Ohio. The remaining 28 states restrict car title loans, meaning they prohibit them by statute, don’t permit them under credit laws or authorize them at lower rates.
Be sure to look up the legal details for your particular state.
Auto title loan terms
Requirements: A fully-paid-off car, government-issued photo identification, clear car title, proof of residence, proof of insurance and sometimes proof of income. Note that In Arizona, lenders are permitted to approve a car title loan even if you don’t own your car in full. They will lend to you based on the equity you have in your vehicle (source).
Loan length: 30 days or less, on average.
Cost: On average, interest charges total 25% of the loan a month, which is the equivalent of a 300% annual percentage rate (APR), according to the Consumer Financial Protection Bureau’s (CFPB) report on Single Payment Vehicle Title Lending. Some states permit lenders to charge fees as well.
Loan amounts: From $100 to $25,000, or 25% to 100% of the car’s fair market value. It varies by state and lender. The CFPB report above found the average car title loan amount to be $959.
If you can’t pay: Lenders can repossess your vehicle to recover their loss. In some states, lenders also offer a rollover option that extends the loan an additional month for a fee. According to the CFPB report, 9% of 30-day loans default. Furthermore, more than 80% of loans are re-borrowed on the day they are paid off.
- Quick access to money
- No credit check required from national credit reporting bureaus
- Must own your car free and clear (except in Arizona)
- Some lenders charge expensive interest charges and fees
- Short-term nature of some of these loans combined with high fees can make it harder to pay them back. Many get stuck in a cycle of re-borrowing to catch up
- If you can’t repay the loan for some reason, you may have to forfeit your car for a percentage of what it’s worth
- Not available in all states
Why car title loans have a reputation for being risky
Car title loans have been referred to as “predatory.” The FTC encourages consumers to slow down, understand the costs and consider other options. But what’s the big risk?
This type of loan can be one of the most expensive on the market regarding the APR lenders charge and can also have short repayment periods. When these two factors are combined, it can make it hard to repay the loan on time. When the loan is repaid, the borrower often takes another loan shortly afterward. In fact, the CFPB report found that 85% of people who took out car title loans re-borrowed within 30 days.
The pattern of repeat borrowing is called a loan sequence, and 59% of people who take out car title loans re-borrow over four times within a rolling 12-month period. Furthermore, 26% reborrow over 10 times within 12 months. Do they eventually find their way out of car title loan dependence? The data shows that 56% of borrowers end up repaying their loan after a multi-loan sequence. However, 25% end up defaulting.
What happens if you don’t pay an auto title loan?
When a default occurs, the lender can take the borrower’s vehicle. This can make a person’s situation worse, especially if the car was their mode of transportation to work or school. To add salt to the wound, in some states, lenders keep the difference between what you owe and what they get for your car. This leaves you with no car, potentially having only received a percentage of what it was worth.
For these reasons, car title loans can be risky. However, not all lenders have such harsh terms.
Finova Financial, for one, focuses on socially responsible online lending. They offer quick decisions, same day cash, and online applications. Furthermore, good credit isn’t required. While all of those features are important, they shine when it comes to their costs and repayment length. Learn more about Finova Financial
Review and compare car title loan lenders
While car title loans can be risky, there are lenders with offers that are more manageable for borrowers. If you are interested, shop around and compare offers to ensure you get the best possible terms. You can easily review several lenders on our Auto Title Loan Review page.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.