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What Is a Title Loan

Car title loans are a type of short term secured loan that allows individuals to borrow money using their vehicle as collateral. The loan is secured by the borrower’s car title, which is held by the lender as collateral until the loan is repaid which typically lasts 15 or 30 days. The lender will give the borrower a loan amount based on the value of the vehicle, and the borrower will be required to provide the lender with a copy of the car title as well as proof of income and insurance.

How does a car title loan work?

Title loans typically work by the borrower providing the lender with the title to their vehicle and a set of keys as collateral. The lender will then assess the value of the vehicle and offer the borrower a loan amount based on that value.

Car title loans, also known as title loans, are short-term loans that typically last 15 or 30 days. They use a vehicle, such as a car, truck, motorcycle, or other vehicle, as collateral. The loan amount is usually between 25% to 50% of the vehicle’s value.

To obtain a car title loan, the borrower must give the lender the title to their vehicle. The borrower usually needs to own the vehicle free and clear, but some lenders will accept the title if the borrower has paid off most of their vehicle loan. The lender will also require the borrower to present the vehicle, a photo ID, and proof of insurance. Many lenders also require a duplicate set of keys for the vehicle.

When the loan is granted, the lender keeps the title to the vehicle until the loan is repaid, along with the lender’s finance charge and any other fees. Car title loans are expensive, with an average monthly finance fee of 25%, which translates to an APR of around 300%. Lenders may also charge additional fees such as processing, document, and loan origination fees, as well as requiring the borrower to purchase add-ons such as a roadside service plan.

A typical car title loan works as follows:

  • You want to borrow $8,000 for 30 days.
  • The finance fee is 25%, so you have to pay $200 to borrow $800.
  • You give the lender the title to your car, and the lender gives you $800 in cash.
  • When it’s time to repay the lender in 30 days, you must pay $1,000, plus any other fees the lender charges.

If the borrower is unable to repay the loan on the due date, the lender may allow the loan to be rolled over into a new loan. However, this will add more interest and fees to the amount owed. For example:

  • Using the example above, on the original due date you don’t pay but instead roll over the 30-day, $800 loan for another 30 days.
  • The rollover will add another $200 in finance fees, plus any other fees, to the amount you owe.
  • This brings the cost of borrowing $800 for 60 days to at least $400.

If the borrower is unable to repay the loan, the lender may repossess the vehicle, even if the borrower has been making partial payments. Some lenders may also install GPS and starter interrupt devices to make repossession easier. Once the lender repossesses the vehicle, they can sell it, leaving the borrower without transportation. In some states, lenders can keep all the money they get from selling the vehicle, even if it exceeds the amount owed.

Title loan fees

Title loan fees vary depending on the lender and the state in which you live. Some of the most common fees include:

  • Finance charges: This is the fee you pay for borrowing the money. Title loan finance charges are usually calculated as a percentage of the amount you borrow, with an average rate of 25%. This translates to an annual percentage rate (APR) of around 300%.
  • Processing fees: Some lenders charge a fee for processing your loan application. This can be a flat fee or a percentage of the loan amount.
  • Document fees: Some lenders charge a fee for the paperwork associated with the loan, such as loan origination or closing fees.
  • Add-ons: Some lenders require you to purchase additional products or services, such as a roadside service plan, as a condition of the loan.
  • Rollover fees: If you are unable to repay the loan on time, some lenders will allow you to roll it over into a new loan. This will add more interest and fees to the amount you owe.
  • Returned check fees: If you provide a check as payment and it bounces, you may be charged a returned check fee.
  • Late fees: Some lenders charge a fee if you do not repay the loan on time.

How much can borrow with a title loan

The amount that can be borrowed with a title loan will vary depending on the lender and the value of the vehicle being used as collateral. Typically, borrowers can expect to receive a loan amount between 25% and 50% of the value of their vehicle. For example, if a vehicle is valued at $10,000, the borrower may be able to borrow between $2,500 and $5,000.

Are Title Loans Legal 

The legality of title loans varies by state. Some states, such as Alabama, Arizona, Delaware, Georgia, Idaho, Illinois, Mississippi, Missouri, Nevada, New Hampshire, New Mexico, Tennessee, Texas, Utah, Virginia, and Wisconsin, permit title loans at triple-digit APRs.  Of these states, Delaware, Idaho, Illinois, Missouri, Nevada, New Mexico, Utah and Wisconsin set no cap on the cost of a car title loan.

However, in some states, title lenders use loopholes to circumvent state credit laws. For example, in California and South Carolina, title loans are available for larger amounts to avoid the small loan rate cap. In Kansas, title loans are structured as open-end credit, since Kansas has no rate cap for open-end credit from licensed lenders. In Louisiana, car title lenders make loans for more than $350 and terms exceeding two months to avoid state law restrictions. In Ohio, title loans are made under credit services organization or mortgage loan laws, and in Florida, title lenders operate under the consumer finance law and include additional fees such as credit insurance fees.

On the other hand, some states restrict title lending or outright prohibit it. These states authorize car title loans at lower rates and likely do not have car title lenders operating in the state, or do not permit car title lending under existing credit laws. This is to protect consumers from high-interest loans and predatory lending practices.

It is important for consumers to be aware of the laws in their state and understand the risks and costs associated with title loans before entering into such an agreement. Consumers should also consider alternative options such as personal loans, credit cards, and loans from credit unions or community banks.

Disadvantages of car title loans

Car title loans can come with high interest rates and fees, which can make them very expensive. The lender also has the right to repossess the vehicle if the borrower is unable to repay the loan on time, which can cause a significant financial loss. Additionally, if the borrower defaults on the loan, they can lose their vehicle, which can be a major inconvenience.

Advantages of car title loans

One of the main advantages of car title loans is that they can provide borrowers with quick access to cash. They are also relatively easy to obtain, and even individuals with poor credit can qualify. Additionally, car title loans can be a good option for people who do not have access to other forms of credit, such as credit cards or personal loans.

Do title loans go on your credit score?

In most cases, title loans do not show up on your credit report and therefore do not affect your credit score.

This is because title loans are not reported to the major credit reporting bureaus (Experian, Equifax, and TransUnion) unless the borrower defaults on the loan. If a borrower defaults, the lender may report the unpaid loan to the credit bureaus, which can negatively affect your credit score. However, if you make all of your payments on time and pay off the loan in full, your credit score will not be impacted.

Alternatives to title loans

  • Personal loans: Personal loans are unsecured loans that can be obtained from banks, credit unions, or online lenders. They typically have lower interest rates and fees than title loans, and the loan amount is not based on the value of a vehicle. Personal loans can be used for a variety of expenses, including consolidating debt, paying for medical expenses, or making home improvements.
  • Credit cards: Credit cards can be a good alternative to title loans as they offer a revolving line of credit that can be used for a variety of expenses. Credit cards typically have lower interest rates than title loans, and some even offer introductory 0% interest rates for a certain period of time.
  • Friends and family: Borrowing from friends and family can be a good option for those in need of a loan. It can be less formal than a traditional loan and may come with more flexibility in terms of repayment.
  • Renegotiate current debt: If you are struggling to make payments on existing debts, consider reaching out to your creditors to see if they can offer you a more favorable repayment plan.
  • Ask for an extension on your bills: Some utility companies and landlords may be willing to offer an extension on your bills if you are having difficulty making payments.
  • Loan from a credit union: Credit unions are non-profit financial organizations that offer loans to their members. They typically offer lower interest rates than banks and can be a good alternative to title loans.
  • Visit a community bank: Community banks are known for their personalized service and can be a good option for those in need of a loan. They may be more willing to work with customers who have less-than-perfect credit.
  • Use your tax refund: If you are expecting a tax refund, consider using it to pay off outstanding debts or to cover an unexpected expense.
  • Credit counselor: A credit counselor can help you create a budget, negotiate with creditors and develop a debt management plan which may include consolidation loans.
  • Payday Loan: Payday loans are another type of short-term loan with very high interest rates but unlike title loans, payday loans do not require any collateral. Instead, they are based on your income and employment status.

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