Car title loans: What they are and how they work Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by offering you interactive tools and financial calculators that provide objective and original content, by enabling you to conduct your own research and compare information for free to help you make informed financial decisions. Bankrate has partnerships with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn money The products that appear on this site are from companies that pay us. This compensation may impact how and when products are featured on this site, including, for example, the order in which they may be listed within the categories of listing and other categories, unless prohibited by law. This applies to our mortgage or home equity products, as well as other home lending products. However, this compensation will affect the information we provide, or the reviews that you read on this site. We do not cover the entire universe of businesses or financial offers that may be open to you. Barry Winiker/Getty Images
5 minutes read. Published October 19, 2022
David McMillin wrote the article. David McMillin Written by Contributing writer David McMillin is a contributing writer for Bankrate and writes about topics like credit cards, mortgages, banking, taxes and travel. David’s aim is to help readers figure out how to save money and also stress less.
Editor: Rhys Subitch Editor: Rhys Subitch Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to control their finances by providing clear, well-researched facts that break down complex subjects into digestible pieces. The Bankrate promise
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We are compensated in exchange for placement of sponsored products and services or by you clicking on certain links posted on our website. So, this compensation can impact how, where and when products are listed and categories, unless it is prohibited by law. This is the case for our mortgage, home equity, and other home loan products. Other factors, such as our own website rules and whether the product is available within your region or within your personal credit score can also impact the way and place products are listed on this website. While we strive to provide an array of offers, Bankrate does not include information about every financial or credit products or services. All loans are risky if they’re not repaid in time. But a title loan has a particularly threatening consequence if you fail to meet your payment obligations and the lender can take your vehicle. If you are considering obtaining an auto title loan it is essential to understand the potential disadvantages of using your car as collateral to obtain money. What are car title loans? A car title loan or “pink slip loan,” allows you to get a loan of anywhere between 25 to 50 percent of the value of your vehicle in exchange for giving the lender the title to your vehicle as collateral. These short-term loans generally start at $100 with repayment periods of 15 to 30 days. Title car loans are designed for those with past credit challenges who require cash fast. The majority of lenders have low to no credit requirements — some won’t even . The application process is usually simple, and if accepted, you could anticipate receiving funds within 24 hours later — often, even earlier. Access to loans is easy, which implies that these loan products come with steep interest rates. Certain states limit the amount of interest lenders are allowed to charge while others have no restrictions. In some states, lenders are prohibited from offering the car title loans to customers. If you are in a state where car title loans are permitted, you typically need get an loan. Some lenders provide these loans for vehicles that are nearly paid off, but this is not as common. How do title loans function? Title loans come in a range of different varieties. Some are single-payment loans and the borrower has to pay the full value of the loan together with the interest fee within the month or so. They are repaid in 3 or 6 months, based of the lender. Although the word “car” might be part of the title of the product but these loans also can be available for boats, motorcycles and other recreational vehicles. You can apply online or in person, but you’ll need to visit an actual location to present your car before the lender. Be sure to provide the lender with clear title and a photo ID , when applying for a car title loan. The lender may also want keys. The vehicle remains in your possession until the time of repayment until you fail to pay the loan. To illustrate how these loans work, assume you own a vehicle worth $5,000 and encounter an emergency and require $1000. A title loan allows you to take out a loan against your car so that you can get the $1,000 quickly. Like a mortgage, which utilizes the home’s equity as collateral the title loan uses your vehicle as collateral. To obtain the title of your vehicle back the loan must be paid in total, which includes the high charges the lender charges for providing the cash. These fees typically comprise an average monthly finance fee of 25 percent, which translates to an APR of 300 percent. For a $1,000 loan, you’ll pay the additional amount of $250 for interest even when the loan is paid back in only 30 days. If you’re in default with your payments and late penalties for late payments are assessed and imposed, your loan can cost a small fortune. Some lenders also charge origination, processing and document costs, which can drive the cost of borrowing higher. It is also possible that you will be required to purchase and pay for a roadside service plan for your vehicle. There are downsides to title loans While the process of getting a title loan could be simple but it’s also a source of high costs and risks, according to Graciela Aponte-Diaz, director of federal campaigns at the Center for Responsible Lending. “If you can’t pay back the loan in time, it’s rolled over into another cycle, which incurs more costs,” says Bruce McClary who is the senior vice-president for communications with the National Foundation for Credit Counseling. “It results in a very stressful situation for those who are already struggling to pay. This is the specific definition of the cycle of debt.” The main drawback to this is the risk of losing your vehicle. If you are unable to repay the loan the lender can take your vehicle and sell it in order to recover their investment. And this isn’t all that common. A study from the found that 20 percent of those who apply for title loans have their vehicles confiscated. Even worse, “some car title lenders use a GPS device, dubbed”kill switch”which could stop the borrower’s vehicle from beginning by using this method to collect the loan or making it easier to seize the car,” Aponte-Diaz adds. Because of the risk of losing your primary source for transportation, it’s easy to see the way a title loan could be a stressful experience. Solutions to the title loans With all the negatives, McClary recommends reaching out to traditional credit unions and banks to identify less costly lending options. Also, you could utilize a credit card when you have one in your possession for your immediate cash needs. Even even if you don’t have an existing bank account, have a poor credit score, or struggled with poor financial decisions previously, you should consider the various options available. “It’s amazing how flexible these traditional lenders are,” McClary says. “There are many credit unions that are willing to work with non-banked customers.” Apply for personal loan While getting an individual loan could be difficult if you have bad credit, you may have options. Certain online lenders may be eligible to apply for. If you’re a member of a credit union, you can also try telling your story to an official at a bank. They may approve you for an loan in light of the strength of your connection and your financial record. It is also possible to request a relative or friend who has a stable source of income and a strong credit score to join you , thereby increasing the odds of getting approved. Consider an alternative to a payday alternative loan Payday alternative loans are a cheaper option to look into. They are available through a few credit unions, however you need to be a member to access this loan product. Loan amounts range between $200 and $2,000 that are payable over a period of between one and 12 months. The fee for application is set at $20. You’ll pay no more than 28 percent of interest. This is what makes payday alternative loans less expensive than car title loans as well as some bad credit personal loans. Use a credit card You can also apply for a credit card if you are facing a financial emergency. It is also possible to take money from your credit card using the use of a . Be aware that the interest rate for cash advances can be much more than what you pay for purchases — anywhere from a to 30 percent for variable. Plus, there’s no grace period and interest will start accruing right away. Expect that you’ll have to cover an ATM fee to withdraw your funds. McClary does not recommend adding to credit card debt but suggests it’s a better choice as opposed to an auto title loan since you’re likely to pay far lower interest rates than with an auto title loan. The bottom line: Car title loans are a great alternative to get cash fast. But, the price is typically far from the danger involved, and you could end up in a far worse situation than prior to taking off the loan. Think about alternatives that are more affordable such as credit cards, private loan and payday alternative loan prior to settling on a car title loan. But if you’ve exhausted all options and must use a car title loan ensure you read the fine print. Title lenders need to present you with loan the terms in writing prior to signing, and federal law requires that they are transparent and upfront about the amount for the loan.
Written by Contributing writer David McMillin is a contributing writer for Bankrate and covers topics such as mortgages, credit cards and credit cards banking, taxes, and travel. David’s mission is to assist readers figure out how to save more and stress less.
Written by Rhys Subitch Edited by Auto loans Editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to take control of their finances with concise, well-studied facts that break down complicated topics into digestible pieces.
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