A car title loan, also known as an auto title loan or pink slip loan, is a short-term secured loan that uses your car as collateral. When you apply for a car title loan, the lender will evaluate the value of your car and offer you a loan amount based on that value.
Once you agree to the loan terms, the lender will hold the title of your car as collateral until you repay the loan in full. If you fail to repay the loan, the lender can take possession of your car and sell it to recover its money.
How do car title loans work?
Car title loans are available online or through brick-and-mortar lenders. To obtain a loan, you must fill out an application and show proof of a clear title (meaning you own the car outright). You will also be asked to provide a photo ID, and, depending on how you apply, photos of your car or the car itself. Some lenders will require an extra copy of your car keys or make you buy a roadside assistance plan.
Upon approval, the lender will typically lend you 25% to 50% of your car’s value and keep the title to your car. You can continue to drive your car as usual. When it is time to repay the loan—usually within 15 to 30 days—you pay the lender the amount you borrowed, plus interest. Note that interest rates on car title loans are high, often as much as 25% of the loan amount.
If you cannot repay the loan on time, some lenders will roll over (renew) the loan for additional interest. Ultimately, the lender can repossess the car, leaving you without transportation.
Car title loan examples
The terms and conditions of car title loans can vary widely depending on the lender and state laws, so it is important to research and compare different options before choosing one. While many lenders charge exorbitant interest rates, not all do. It is important to work with only reputable lenders and read the fine print carefully to avoid hidden fees and charges.
Here are two examples of how car title loans work:
Example #1
You're offered a 30-day car title loan for 50% of your car's value at a 25% interest fee. Your car is worth $8,000, so the car loan principal is $4,000. At the end of 30 days, you must pay the lender $4,000 + 25% of $4,000 or $1,000 for a total of $5,000. This represents an annual percentage rate (APR) of over 304%.
Example #2
You're offered a 15-day car title loan for 25% of your car's value at a 25% interest fee. Your car is worth $8,000, so the car loan principal is $2,000. At the end of 15 days, you owe the lender the original loan amount of $2,000 + 25% of $2,000 or $500 for a total of $2,500. In this case, the APR is more than 608% due to the shorter term.
The examples above do not include fees or other costs, such as processing, document, and loan-origination fees. You may also be required to buy add-ons, such as a roadside service plan, which adds to the overall cost of the loan.
Car title loan pros and cons
Car title loans can be a source of quick cash for people who need it, but they also come with significant downsides. Here’s a list of pros and cons:
Pros:
- Quick access to cash: Can often be processed quickly and provide borrowers with access to cash when they need it
- No credit check: Lenders often do not require a credit check, making them an option for people with poor credit
- Continued use of your car: While the lender holds the title of your car as collateral, you can still use your car as usual during the loan period
- Flexible loan terms: Certain car title loan lenders may offer flexible repayment terms, including longer repayment periods and the ability to roll over the loan if needed
- No prepayment penalties: Many car title loan lenders do not charge prepayment penalties, meaning you can repay the loan early without incurring additional fees.
Cons:
- High interest rates and fees: Often come with high interest rates and fees, making them an expensive option for borrowing money
- Risk of losing your car: If you cannot repay your loan, the lender can take possession of your car and sell it to recover its money
- Predatory lending practices: Some lenders engage in predatory lending practices, such as offering loans with unclear terms or charging hidden fees
- Short repayment window: Many lenders offer only extremely short repayment options of 30 days or less
- Variable state regulations: Car title loan regulations vary by state, so it is important to review your state's laws and regulations to ensure that you are working with a reputable lender and that your loan complies with state laws
Requirements for a car title loan
The requirements for a car title loan can vary by lender and state, but here are some common requirements borrowers need to meet:
Clear title
You must own your car outright and have a clear title. This means that there are no outstanding liens or loans on the car.
Proof of income
Car title loan lenders often require proof of income, such as pay stubs or bank statements, to ensure that you have the ability to repay the loan.
Identification
To verify your identity, you will need to provide a government-issued ID, such as a driver's license or passport.
Proof of residency
Car title loan lenders may require proof of residency, such as a utility bill or lease agreement, to verify your address.
Vehicle inspection
The lender will need to inspect your car to determine its value and condition. Some lenders may require an in-person inspection, while others may accept photos or videos of the car.
Minimum age
You must be 18 years old to qualify for a car title loan.
How to apply for a car title loan
To apply for a car title loan, follow these steps:
Research lenders
With so many car title loan lenders, start by researching reputable lenders in your area and online. Look for lenders that have positive reviews and are licensed and regulated by your state.
Gather the required documents
Before applying for a car title loan, gather any required documents, such as your car title, proof of income, and identification.
Obtain a quote
Contact the lender to get a quote for the loan amount you are seeking. The lender will evaluate the value of your car and offer you a loan amount based on that value.
Submit your application
If you decide to proceed with the loan, submit your application to the lender. The lender will review it and may require additional documentation or information.
Complete the vehicle inspection
The lender will need to inspect your car to determine its value and condition. Some lenders may require an in-person inspection, while others may accept photos or videos of the car.
Receive your loan
If approved, the lender will typically advance you the loan amount in cash or by depositing the funds into your bank account.
Repay your loan
Review the loan terms and ensure you understand the repayment schedule, interest rate, and fees and that you have a plan to repay the money you borrowed. And then, of course, repay the loan to avoid the loss of your collateral (car).
How do car title loans affect your credit score?
Car title loans typically do not affect your credit score directly since most lenders do not report to credit bureaus. However, if you fail to repay the loan and the lender takes possession of your car, it may report the default to credit bureaus, which can negatively impact your credit score.
Default can also result in the lender taking legal action to collect the debt. This can result in a court judgment against you, which can also appear on your credit report and negatively impact your credit score.
As noted above, consider the repayment terms of a car title loan and ensure that you can repay the loan in full before taking out the loan. This will help you avoid defaulting on the loan—damaging your credit score and ending up with no car. If you are unsure whether a car title loan is right for your financial needs, consider speaking with a credit counselor or financial advisor for guidance.
How car title loans differ from other types of loans
Car title loans differ from other types of loans in several ways:
Secured vs. unsecured
Car title loans are secured loans that use collateral (your car) to secure the loan. Other types of loans, such as personal loans or credit cards, are unsecured and do not require collateral.
High interest rates
Car title loans often come with high interest rates and fees, making them a more expensive option for borrowing money than other types of loans.
Short repayment periods
Most car title loans have short repayment periods, often 30 days or less. Other types of loans may offer longer repayment periods, allowing borrowers more time to repay the loan.
No credit check
Car title lenders often do not require a credit check, making them an option for people with poor credit or no credit history. Personal loans or mortgages require a credit check and reasonably good credit to qualify.
Limited loan amount
The amount you can borrow with a car title loan is typically limited to a percentage of the value of your car. Other types of loans may offer higher loan amounts, depending on your credit history and income.
How much does a title loan cost?
The cost of a car title loan can vary widely depending on the lender, state regulations, and other factors. Here are some common costs associated with car title loans:
Interest rates
Car title loan interest rates can be very high, often in the triple digits, making borrowing money through a car title loan an expensive option.
Fees
Some car title loans have fees, including origination and late payment fees. These fees can add up quickly and increase the total cost of the loan.
Repossession fees
If you cannot repay the loan, the lender can repossess your car and sell it to recover their money. Repossession fees can add additional costs to the loan.
Rollover fees
Some car title lenders allow borrowers to roll over the loan if they cannot repay it on time. However, this can come with additional fees and interest charges, making the loan even more expensive.
Alternatives to car title loans
If you are considering a car title loan but would like to explore other options, here are some alternatives to consider:
Personal loans
Personal loans are unsecured loans often obtained through banks, credit unions, or online lenders. These loans may offer lower interest rates and longer repayment periods than car title loans. Some lenders are open to borrowers with bad credit.
Credit cards
If you have a credit card with available credit, it may be a less expensive option than a car title loan. Check the interest rate and fees associated with the credit card, as some cards can come with high rates and fees.
Payday alternative loans
Some credit unions offer payday alternative loans, which are small, short-term loans with lower interest rates and fees than traditional payday loans (another—though often problematic—option).
Borrow from friends or family
If you have friends or family members willing to lend you money, this can be a less expensive option than a car title loan. Be sure to agree on repayment terms and put the agreement in writing to avoid misunderstandings.
Negotiate with creditors
If you are struggling to pay your bills or make ends meet, consider negotiating with your creditors to work out a payment plan or reduce your interest rates.
TIME Stamp: Title loans are an option for those with poor credit, but not a great one
A car title loan is a short-term loan that uses your car as collateral. When you apply for a car title loan, the lender will evaluate the value of your car and offer you a loan amount based on that value.
Once you agree to the loan terms, the lender will hold the title of your car as collateral until you repay the loan in full. During this time, you can still use your car as usual. If you fail to repay the loan, the lender can take possession of your car and sell it to recover its money.
Because car title loans often come with high interest rates and fees, it is important to carefully consider the terms and repayment schedule of the loan before agreeing to it. You should first look hard for more affordable borrowing options before settling on a car title loan.
Frequently asked questions (FAQs)
How much money can I get with a title loan?
The amount of money you can get depends on several factors, including the value of your car and the lender's policies. In general, car title loans can range from a few hundred to several thousand dollars.
The lender will evaluate the value of your car to determine the maximum loan amount it is willing to offer. The loan amount is typically a percentage of the car's value, with most lenders offering amounts that are between 25% and 50% of the car's value. For example, if your car is valued at $10,000, you may be able to borrow $2,500 to $5,000.
What happens when you use your car as collateral for a loan?
When you use your car as collateral, the lender holds the title to it as security for the loan. If you fail to repay the loan, the lender can take possession of your car and sell it to recover its money.
During the loan period, you can still use your car, but the lender will hold the title of your car until you repay the loan in full. Once you have repaid the loan, the lender will return the title to you.
Can title loans mess up your credit?
Car title loans typically do not affect your credit score since most lenders do not report to credit bureaus. However, if you fail to repay the loan and the lender takes possession of your car, it may report the default to credit bureaus, which can negatively impact your credit score.
If you cannot repay the loan, the lender may take legal action to collect the debt. This can result in a court judgment against you, which can appear on your credit report and negatively impact your credit score.
