Title loans are one option borrowers turn to when they need quick cash. Title loans are short-term, secured loans that require a borrower to offer up their vehicle as collateral in order to get a loan. They’re designed to be a short-term solution when a borrower is in need, but they often end up creating a cycle of debt, or leaving customers without their vehicle.

What Is a Title Loan?

A title loan is a secured cash loan where borrowers use their vehicle title as collateral. The loan amount is based on the value of the vehicle. The lender will likely only offer the borrower a percentage of the value of the vehicle in question. 

Apart from paying back the borrowed amount (the principal), borrowers also need to pay the interest rate (the cost of borrowing). On average, title loans may offer lower interest rates, since the loan is secured with collateral. Besides the interest rate, title loans can include other fees as well. 

Title loans are short-term loans for borrowers with bad credit in need of a loan, and depending on your lender, may require one lump-sum payment, or smaller installment payments over time. Most lenders offer a repayment term of one month, but some offer longer repayment terms, and even an option to pay in installments.

How Do Title Loans Work?

In order to get a title loan, you’ll most likely need to bring your car to the lender. During the application process, the owner has to present the title of the car, showing that the borrower is the sole owner of the vehicle, proof of insurance, and photo ID. The lender will likely need to inspect the vehicle in order to determine its value. 

Once the vehicle has been inspected, the lender estimates its value and approves a loan amount based on that valuation. Title loan amounts can usually range anywhere from $100, all the way up to $10,000.

A lender may duplicate your car keys during the application. They could also install a GPS to track your vehicle, and a device to disable your ignition if the lender has to repossess the car. Once you’ve been approved, and receive your funds, you’re free to use your vehicle as desired while making payments on the loan.

If you can’t make a payment on time, the lender might be willing to work with you by offering to refinance or renegotiate the loan terms. However, if you aren’t able to repay the loan, the lender has the right to take your vehicle away. They would then sell your vehicle to recover the loss.

Title Loans vs. Auto Loans

Title and auto loans are both secured loans where a borrower’s vehicle acts as collateral. Auto loans are used to buy a car which then acts as collateral for the rest of the repayment term. Title loans, however, are given based on the value of a borrower’s vehicle. 

While title loans are generally short-term, high-risk loans, auto loans are spread out over a longer period of time, and offer better interest rates and terms. Auto loans allow a customer to purchase a vehicle and pay for it over time, since many borrowers can’t afford to buy a vehicle outright.

The Bottom Line

Title loans are a short-term borrowing option that can be used when you run into a financial emergency. It’s vital to familiarize yourself with all the costs of title loans before using them. To make the right decision, inform yourself about loan terms, repayment options, and create a detailed financial plan you’ll be able to follow.

CreditNinja is an online lender that offers a safer, more affordable alternative to predatory title loans. When applying if we check your credit score, and if you’re approved funds will be deposited to your account as soon as the next business day.¹

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