Title loans, or auto title loans, are a common form of bad credit loans where a borrower’s vehicle is used as collateral to secure a loan. Borrowers often use their car to obtain a title loan, but lenders may also consider motorcycles, boats, or even recreational vehicles.
It’s important to remember that if you fail to repay the loan, the lender can repossess and sell your vehicle to recover their funds. In fact, a California study found that as many as 20% of title loan borrowers have their vehicles repossessed.¹
Since the equity in most vehicles is so high, lenders can usually approve borrowers online quickly, even if they have a less-than-perfect credit history. However, easy online approval and fast cash may not outweigh the risks associated with title loans.
How Do Title Loans Work?
A title loan borrower generally needs a lien-free vehicle title and must provide proof of income and residency in most cases, even with online options. Title loans typically carry high interest rates, and if the borrower can’t repay, the lender can repossess and sell the vehicle.
- First, you would need to find a lender, either online or in person.
- After completing their application they will review it, and your vehicle, and determine whether to approve you for a loan.
- If approved, you would provide your vehicle title to the lender.
- You would then receive a fraction of the value of your vehicle as a loan. This amount may be anywhere from 25–50% of the value of your vehicle.
- Once you repay the loan, you get your title back and the transaction is complete.
However, the high rates and short repayment periods can make title loans difficult to repay on time. Which means some borrowers end up losing their vehicles altogether.
Risks and Benefits of a Car Title Loan
At CreditNinja we encourage our customers to carefully consider the following advantages and disadvantages before offering up your car as collateral with title loans.
Benefits of Title Loans
Risks of Title Loans
1. Fast Access to Cash – They can usually be obtained quickly, often within a day or two, especially online options.
1. High Interest Rates – Typically, they have much higher interest rates compared to other loans.
2. No Credit Check – Some title loans don’t require a credit check, making them accessible to those with poor or no credit.
2. Risk of Repossession – If you fail to repay, the lender can repossess and sell your car. It’s reported that 1 in 5 cars are repossessed for failure to repay the loan.
3. You Can Still Use Your Vehicle – Even after getting a car title loan, you can continue to use your car as long as you keep making payments.
3. Short Repayment Periods – They usually have short repayment periods, often 30 days, which can create financial stress.
4. Loan Based on Car Value – The amount is determined by the value of your car, not your credit score or income, so you may be able to borrow more than with other types of loans.
4. Potential for Debt Cycle – Due to high interest and short repayment terms, borrowers can get trapped in a cycle of debt if they can’t repay on time.
A Brief History of Title Loans
They first emerged in the early 1990s during an economic downturn. Traditional banking services became inaccessible to many, and title loans emerged to fill this gap. These loans typically carry significantly higher interest rates than traditional loans, due to the associated risk.
Over the years, this loan industry has expanded, with a notable rise in online lending platforms. Approximately 2 million Americans use car title financing annually², highlighting the reach of such loans. Regulation varies by state, with some states imposing strict limitations on interest rates and loan terms, while others allow more liberal practices. Despite their high costs and risks, they continue to serve as a short-term online financial solution for many individuals who need immediate cash.
How Do You Qualify?
To qualify, typically you need a fully paid-off vehicle with a lien-free title, proof of income, and residency. Every lender’s process may vary slightly, but generally, you’ll complete an application and submit the necessary documentation. Depending on the lender, you can either apply online or in person at a storefront location.
Although they may offer cash fast, interest rates are typically higher than traditional lending options since many car title loan borrowers have lower-than-average credit scores. The rates can be influenced by factors such as state regulations, loan size, and the borrower’s ability to repay. It’s crucial to understand the loan agreement and the rates before signing for one.
What Do I Need to Apply Online?
Often, online lenders are able to electronically receive documents and process them online. The documents most online title loan lenders require are:
- Qualifying Photo ID – Online title loan lenders usually require government-issued photo identification, such as a driver’s license, passport, or military ID.
- Free-and-Clear Car Title – Borrowers for online title loans must give lenders their vehicle title for the duration of their loan. During this time, the lender will sign onto the car title as a lienholder.
- Vehicle Photos for Online Title Loans– Some lenders for online title loans will accept photos of a borrower’s vehicle in lieu of an in-person inspection. Borrowers should take pictures of their car from multiple angles, in good light, so the lender can get a clear picture of what the vehicle looks like.
- Proof of Income – To prove they have sufficient income to repay their loan, borrowers must show proof of income with documents such as a paystub, bank statement, or tax statement for online title loans.
- Proof of Residency with Online Title Loans– Borrowers can prove where they live by providing documents like a lease agreement, mortgage statement, or other important bills/documents containing both the borrower’s name and address.
- Bank Account Information (sometimes) – Some lenders require bank account information so they can send approved funds via direct deposit. Other lenders may be able to send quick approved funds via a check in the mail or wire transfer.
- Personal or Professional References (sometimes) – It’s also not uncommon for lenders to request that borrowers include personal references for title loans online. These references can usually be either personal or professional.
These loans usually offer various repayment options, from lump sum payments to installment plans. If you find it challenging to meet your repayment schedule, some lenders may offer refinancing or restructuring options. Depending on the lender, you may be able to pay online, through automatic payments, or in person.
Alternatives to Title Loans
If you don’t want to risk your car by using it as collateral, you can look into various funding alternatives. Other loans and creditors you may consider are:
- Community or local banks.
- A credit union.
- A credit card.
- Debit cards.
- Direct lenders online.
- Borrow money from a family member.
Check out more information on common alternatives below.
- Bad Credit Loans: These are secured or unsecured loans designed for borrowers with poor credit. Examples include home equity lines of credit and pawn loans.
- No Credit Check Loans: These loans don’t involve hard credit inquiries during approval, though lenders may perform soft checks to verify the borrower’s financial standing.
- Payday Loans: These are short-term, high-interest loans designed to provide quick cash between paychecks. Repayment is typically expected within two weeks.
- Installment Loans: These personal loans can be used for various purposes, with either fixed (consistent payments) or variable (fluctuating payments) interest rates.
- Cash Advance Loans: These are similar to payday loans, designed to offer quick, small-amount funding with high interest rates and short repayment terms.
- Quick Cash Loans: These loans, including payday, cash advance, bad credit, or personal installment loans, can provide fast cash. The terms depend on the borrower’s credit score, income, and financial situation.
It’s always smart to go into a loan prepared. Before applying, consider how long you want to take to pay off your loan, what you want your monthly payments to be, and how much funding you are looking for in total. These answers will help guide you toward the right types of loans that may work best for you!
Alternative Loans Comparison
|Borrowing Option||Collateral Required||Average Interest Rate||Loan Term||Credit Check|
|Title Loans||Yes (Car title)||25-50% per month||Short-term (15-30 days)||Usually no|
|Personal Loans||No||6-36% annually||Medium to long-term||Yes|
|Credit Cards||No||15-25% annually||Revolving||Yes|
|Payday Loans||No||390-780% annually||Short-term (up to 2 weeks)||Usually no|
|Home Equity Loans||Yes (Home)||5-9% annually||Long-term||Yes|
|Pawn Loans||Yes (Pawned item)||15-240% annually||Short-term||No|
Regulations and Laws
In-person title loans and title loans online are regulated at both federal and state levels to protect borrowers from unfair practices. Laws can vary significantly from state to state, affecting aspects such as interest caps, loan terms, and repossession rules.
On the federal level, the Truth in Lending Act (TILA) requires lenders to disclose the terms and cost of all loans. This means lenders must provide clear information about the annual percentage rate (APR), the finance charge (the dollar amount the loan will cost), and the total payments the consumer must make.
Laws differ greatly by state. Some states have strict regulations, while others have none at all. Here are some ways in which the regulations can vary:
- Interest Rate Caps: Some states limit the APR that can be charged. For instance, Florida caps interest rates at 30% for the first $2,000, 24% for any amount between $2,000 and $3,000, and 18% for any amount above $3,000. Other states, like Missouri, allow for much higher rates.
- Loan Limits: Some states limit the amount that can even be borrowed. In California, for example, the minimum amount for a title loan is $2,500.
- Loan Term Limits: Some states limit the length of the loan term. For example, in Virginia, title loans must be due in no less than 120 days and no more than 12 months.
- Repossession Rules: States also vary in their regulations concerning vehicle repossession. Some states allow lenders to repossess a vehicle immediately after a borrower defaults. Others require lenders to give borrowers an opportunity to catch up on payments before proceeding with repossession.
- Prohibitions: Certain states, such as New York, North Carolina, and Massachusetts, have banned them altogether due to their high-interest rates and the risk they pose to consumers.
As the regulations are so diverse, it’s crucial to understand the specific laws in your state before you consider a title loan. Local consumer protection agencies or a legal advisor can provide information about the specific regulations in your state.
Frequently Asked Questions
Usually, a free-and-clear vehicle title is needed. If you’re still making payments, you might negotiate a loan to cover your remaining balance, increasing your loan amount.
Some lenders may provide a loan if you have enough equity in the vehicle but often you will need to own the car outright.
The vehicle must be legally registered in your name for a title loan.
The loan amount depends on the vehicle’s equity, determined by its year, make, model, improvements, and damages.
Processing time varies, often within a day or two.
Repayment terms vary by lender and state, ranging from 30 days to several months or years.
Fees vary by lender and can include origination, documentation, late payment fees, finance fees or even sometimes a monthly finance charge.
Interest rates are determined by state laws and the lender’s policies and are usually higher than other types of loans.
Some lenders allow loan extension or refinancing, which could involve additional fees and increased interest.
Late or missed payments can lead to fines and possible repossession of the vehicle.
Most lenders allow early payment without penalty, but policies vary.
You are still obligated to pay back the loan. If insured, your insurance payout may be used to pay off the loan.
There are online or in-person title loans. There are also title loans that you repay in one lump sum, and options that can be paid back over the course of several months.
When you borrow money from a title lender, most don’t put any restrictions on how you spend it once you’re approved for a loan.
Online lenders and storefront lenders both offer this type of loan. It’s wise to research any lender you’re considering before filling out the application.
Borrowers with no credit, or a low credit score who need fast cash for an emergency and own a vehicle are who will benefit the most. However, if you can get approved for a lower-cost option, you may want to consider an alternative type of loan.
The best interest rates will vary depending on the lender, your specific situation, and the laws and regulations where you live.
Getting the most money you can from a title loan will depend on how much your vehicle is worth. You may be offered anywhere from a few hundred dollars, up to several thousand depending on the value of your vehicle.
The repayment terms you get will also depend on the specific lender and the laws in your state. Some lenders offer short repayment in a matter of weeks, while others may allow you to repay it over several months.
A Note on Car Title Loans from CreditNinja
At CreditNinja, we understand the tough financial hurdles you might encounter and the value that title loans can offer in addressing urgent cash needs. However, we believe in full transparency: title loans come with high interest rates along with an average monthly finance fee of 25% of the borrowed amount. Pair that with the potential to lose your vehicle and you’re taking on a lot of risk.
We strongly encourage you to have a solid repayment strategy to avoid potential pitfalls like extra fees or, in worst-case scenarios, vehicle repossession. No matter how much cash you need, it may be wise to review more affordable personal loan options. Luckily, there are plenty of personal loan options out there for borrowers with low credit scores.
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