How They Work, Cost, Alternatives
4 min read- Title loans use your car as collateral, meaning the lender can repossess your car if you don’t pay.
- Title loans often need to be repaid within 15 to 30 days and charge interest rates around 300%.
- Alternatives to title loans include credit cards, personal loans, side gigs, and local charities.
A title loan is a short-term high-interest loan that uses your car’s title as collateral when you borrow money. That means the lender can repossess your car if you don’t pay back your loan on time. Many title loan lenders don’t consider your credit history at all when making lending decisions.
If you’re in a bind, have poor credit, and need money fast, a title loan may seem to be an attractive option to get your cash. But title loans come with significant downsides. Title loans are risky because they charge high fees and you’re at risk of losing your car if you fall behind on payments.
Title loan lenders generally target borrowers with low credit scores or minimal credit history who can’t qualify for lower cost loans elsewhere.
“In an ideal world, nobody would be taking out a title loan,” says Evan Gorenflo, senior financial advisor with the personal finance app Albert. “It’s not something that you typically connect with getting ahead or a financial goal. It’s more designed to help you out in a desperate time.”
What’s the cost of a title loan?
Title loans generally have interest rates equating to 200% to 300% APR. A title loan usually has a better interest rate than a payday loan, which can carry an APR of 400% or more. However, its rate is significantly higher than personal loans or credit cards, which usually have maximum APRs around 36%.
“Title loans are tricky because a lot of people rely on their car for making money,” says Gorenflo. “In this situation, you’re giving up your title as collateral. Sometimes you’re giving them a second set of keys to your car, they put GPS in your car in some cases, so you’re making it really easy for them to impound your car if you’re unable to pay this back.”
How much can you borrow with a title loan?
The range you’ll be able to borrow depends on your individual situation, but generally lenders will allow you to take out between $100 to $10,000. The usual length of the loan is two weeks to one month, similar to how a payday loan works.
“There’s a limit to how much you can borrow,” says Gorenflo. “If your car’s worth $10,000. they’re not going to let you borrow that whole thing. Sometimes it’s 25% of the cap on whatever your equity is. Some lenders will actually require you to own your car outright before they’ll give you a title loan. Each lender will function a little bit differently.”
Pros and cons of title loans
What are alternatives to title loans?
If you need the money to pay off expenses such as utility bills, credit card payments, or rent, try contacting your creditors to make repayment plans that don’t involve you taking out a loan. You never know what options might be available to you unless you reach out and ask.
Other alternatives to title loans include asking friends for money, taking on side gigs from ridesharing apps, or reaching out to local charities or religious organizations. If you qualify, you might want to take out a credit card or a personal loan with a lower APR than a title loan. You’ll still be borrowing money, but it will cost you less in overall interest.
“If you do need quick money, if you need to earn 200 bucks, you can do that in a weekend with Uber,” says Gorenflo. “Even if it’s a little bit more wear and tear on your car, if it avoids you taking out a 300% interest loan it could definitely be worth it.”
