If you need money, you might be thinking about getting a short-term loan using your car or another vehicle, like a motorcycle, as collateral. Although vehicle title loans are commonly advertised as a good solution to financial troubles, they rarely are.
Before you take out this kind of loan, you should fully understand how car title loans work and seriously consider the costs involved, as well as the risks. You might change your mind about getting one.
Car title loans (also known as auto title loans or vehicle title loans) are high-cost, small-dollar, short-term loans. They have few or no credit requirements, and many lenders won’t even check your credit history.
You can apply for a car title loan completely online or go to a lender’s store. The amount you’ll be able to borrow is based on your car’s worth, like 25% or 50% of the value. The cost of the loan is usually listed in dollars per $100 borrowed. Under this type of arrangement, you keep and drive the car, but the lender keeps the vehicle title as security for repayment of the loan, as well as perhaps a copy of your keys.
To get this kind of loan, you’ll typically have to own your car free and clear. So, if the car is financed and another lender has lien on it, you probably won’t qualify. You’ll also probably need to show the lender your car, as well as provide the actual title, a photo ID, and proof of insurance. If you have bad credit, you can usually still get a car title loan. Again, most lenders don’t require a credit check. The value of the vehicle is the primary consideration for the lender when determining how much to lend.
Like with a payday loan, you’ll have to repay the loan, plus interest and maybe a fee, by a specific deadline, generally 15, 30, or 60 days later, or longer with some lenders. Usually, you may make the payment in person, through the lender’s website, or by automatic withdrawal from your bank account. If you repay the loan, you get the car's title back.
While simply taking out a car title loan usually won’t affect your credit (because the lender might not check your credit beforehand), some lenders do report all payment history, including any defaults, to the credit bureaus. So, under these circumstances, if you miss payments, your credit history will be negatively affected.
But in other cases, getting or failing to repay a car title loan won’t affect your credit because some lenders (in addition to not checking credit ahead of time) don’t report payments or delinquencies. If you lose your car to repossession, though, that could affect your score.
A car title loan could end up costing you a lot of money, especially if you take out one loan after another. Or you might lose your vehicle to repossession.
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 standard.
If you can’t afford to repay the debt when it comes due, the lender might allow you to “roll over” the loan. In exchange for you getting another 30 days to repay your title loan, you’ll pay more interest and more fees. Rolling over the loan can lead to a cycle of debt that will end up costing you a lot of money. Each time you get another loan by rolling it over, you pay more and more. Some states have gone as far as making vehicle title lending illegal. (Learn about other "get cash fast" options to avoid.)
Vehicle title loans are also dangerous because missing even one payment can mean losing your car. In 2016, the Consumer Financial Protection Bureau (CFPB) released a report showing that one out of every five borrowers who take out a car title loan loses the car to repossession. Once the lender repossesses your car, it will sell the vehicle to get its money back.
To find out about the car title loan laws in your state, if your state allows them, consider contacting a consumer protection lawyer. If you're in over your head in debt and want to learn about different options, consider talking to a debt settlement lawyer.