Do you need emergency cash to cover an unexpected expense, but want to avoid pulling your credit? If you own a running vehicle, an auto title loan may be a decent solution to getting the cash you need without credit checks.
While title loans can offer a quick and easy way to access cash, they can also be risky and expensive. It's important to understand the potential consequences of title loans before you apply online.
In this article, we’ll explain what title loans are, how they work, and what you should know before taking one out; and by the end of your reading, you should be well equipped to make the best financial decision for your unique situation!
What is a car title loan?
Title loans are a type of secured loan that uses the title to your vehicle as collateral. When you take out a car title loan, the lender holds your title until the loan is paid back in full. However, you can keep driving your car while making payments.
The amount you can borrow with a title loan depends on the value of your car and your proven ability to repay the loan.
How online title loans work
The title loan process is pretty simple and straightforward. The entire process can be summed up in 5 steps: application, inspection, agreement, disbursement, and repayment.
Step 1: Application
The first step to securing a title loan is completing an online application that requires your personal and vehicle information. During the application, you’ll be asked to verify that your car title is lien-free — meaning there are no outstanding debts or claims on your vehicle.
Step 2: Inspection
Once your application has been submitted and verified, the lender will proceed with a vehicle inspection to determine your car’s value and assess the maximum loan amount you are able to borrow.
You should expect the lender to inspect your vehicle’s interior, exterior, odometer, VIN, and engine
Step 3: Agreement
Upon a successful inspection, the lender will present you with a loan agreement. The agreement will outline your APR (interest rate), payment schedule, finance charges, fees, penalties, and the term of your loan.
⚠️ It is in your best interest to review the loan agreement carefully before signing. If you have any questions, don’t hesitate to ask your lender.
Step 4: Disbursement
Once you’ve signed the loan agreement, the lender will begin the process of disbursing your funds and you’ll be prompted to select your method of disbursement — direct deposit, check, or cash.
If you applied before the lender’s cutoff time, there’s a good chance you’ll receive your funds the same day. If you applied after, you’ll likely receive your funds the next business day.
Step 5: Repayment
The final step is to repay your title loan — and the sooner you pay it off the better. Once your loan is fully repaid, the lender will return your vehicle title to you.
At this point, you’ve completed the entire title loan process and you’re free from any further obligations to the lender.
Weighing the benefits and risks of car title loans
- No credit checks
- Borrow up to $25,000 easily
- You can keep driving your car while making payments
- High APR that can trap you in a cycle of debt
- You risk losing your vehicle if you default on your loan
The benefits of title loans: easy cash with no credit checks
Title loans offer some potential benefits that may be appealing to certain borrowers. The most obvious benefit is that — especially when compared to other loans for bad credit — securing a title loan is incredibly easy.
You can borrow up to $25,000 online with no hassles or credit checks — all you need is a lien-free title, a running vehicle, government-issued ID, and proof of income.
Another attractive feature of this product for many borrowers is that you don’t have to give up your vehicle and can continue driving it throughout the term of your loan.
The risk of title loans: falling into a cycle of debt and losing your car
While car title loans can offer quick and easy access to cash, they can also be risky.
One major concern is the high interest rates attached to title loans, which can make them extremely expensive.
While interest rates depend on several factors (e.g., market rates and — in some cases — your credit history) it is very common to find title loan interest rates around 300%, which can quickly bloat your loan and make repayment difficult.
As an example, if you took out a $1,000 loan with a 30-day repayment term at a 300% APR, you would be required to pay back a total of $1,250 to your lender. In this example, you’re paying $250 in finance charges to borrow $1,000.
For borrowers unable to repay their title loan within 30 days, many lenders offer the option to extend the loan — often referred to as a rollover.
Rolling over your title loan may be a good solution for temporary insolvency but, in doing so, you will add additional fees and interest to your loan making it even harder to pay off.
For example, if you borrowed $1,000 at a 300% APR and rolled it over twice, you would be required to pay back a total of $1,536.39 to your lender (not including fees or penalties). In this example, you’re paying $536.39 in finance charges to borrow $1,000.
If you stop making payments on your loan entirely, the lender can repossess your car and sell it to recoup their losses. This can have serious consequences, especially if you rely on your car to get to work or take care of your family.
Car title loan alternatives
Although title loans are not the worst type of bad credit loan — that award goes to payday loans — there’s still a better option that can save you money in interest and fees: installment loans.
Personal installment loans: a better and more affordable way to borrow money with bad credit
Overall, personal installment loans are a better alternative to title loans, with one caveat: a credit check is required. However, installment loan lenders are primarily concerned with bankruptcies and collections, so you can still qualify for an installment loan even with poor credit.
Another plus is that, unlike title loans, installment loans don't require collateral, which means you don't need to put your vehicle at risk of repossession.
Lastly, installment loans typically carry an average interest rate of 175% — that’s 125 percentage points lower than a title loan, which can save you a lot of money over time!
To illustrate this, if you borrowed $1,000 with a 3-month term at a 175% APR, you would be required to pay back a total of $1,304.86. In this example, you’d save $231.53 in finance charges with an installment loan compared to the cost of rolling over a title loan twice.
How to use title loans responsibly
The best way to manage a title loan is to fully pay down the loan as soon as you possibly can.
If you don’t have the ability to repay a title loan within 30 days, then you should avoid these loans altogether. Remember: the title of your car is at risk.
However, if you are in a position to pay back your title loan on time and you can rightfully afford it, then commit yourself to reading the lender’s terms and conditions carefully before signing, and go ahead and enjoy a little financial breathing room!
In all cases, taking the time to carefully consider your options and compare their pros and cons will help you make a sound financial decision.