Why You Should Avoid Car Title Loans

If you need money, getting a car equity loan or car title loan is rarely a smart financial decision.

If you need money, you might be thinking about getting a loan against the value of your car. This is commonly called a car title loan, auto title pawn, or car equity loan. Although these types of loans are advertised as a good solution to your financial troubles, they rarely are. Here's why you should avoid getting a car title loan.

(Learn about other "get cash fast" options to avoid.)

How Do Car Title Loans Work?

Under this type of arrangement, you keep and drive the car, but the lender keeps the title as security for repayment of the loan, as well as a copy of your keys.

Dangers of Car Equity Loans

These loans are dangerous, because missing even one payment can mean losing your car, even if the car is worth far more than the amount you owe. In 2016, the Consumer Financial Protection Bureau (CFPB) released a report showing that one out of every five borrowers who takes out a car title loan loses the car to repossession.

Lenders may also ask you to use your home, as well as your car, as collateral. This means that if you miss any payments, you risk losing your house as well as the car.

Also, these loans can come with a steep interest rate because your car is considered a used car and its value rapidly decreases. For example, according to the Consumer Federation of America, you might pay $63 to $181 for a one-month $500 title loan. Monthly finance charges of 25% (300% annual interest) are common.

Special Regulations for Members of the Military

The U.S. military classifies car title loans as predatory loans and the Military Lending Act now prohibits car title loans for servicemembers who are on active duty for at least a month and for their dependents.

This is an excerpt from Nolo's Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Amy Loftsgordon and Cara O'Neill.


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