What Is a Title Loan and When Should You Get One?

Do you need to borrow cash quickly? Can’t wait for the bank to process your application and don’t have time to ask your family or employer?

People who need cash ASAP may turn to a product called a title loan.

Title loans allow you to borrow a small amount of money within 24 hours because they don’t require a credit check. All you need to do is put your car title up as collateral.

What are title loans, and should you get one? Read this guide before making an application.

What Are Title Loans?

A title loan is a type of collateral loan that allows you to borrow against the title of your car.

When you borrow using an asset, you can ask for cash without worrying about your credit score.

Most car title loans are $100-$1,000. You can borrow up to 25 percent of the value of the car. Most lenders, like Southwest Title Loans, use the Kelley Blue Book to help assess your vehicle’s worth.

How Do Car Title Loans Work?

To qualify for a car title loan, you need to:

  1. Own your car (have your name on the title)
  2. Have proof of income or employment

You can’t get a title loan for a vehicle that you don’t own free and clear. That means you can’t borrow against a car that you financed because the bank owns the car until you pay back your auto loan.

If your title is in a relative’s name, then their name also needs to go on the loan as proof that they gave you permission to borrow against their vehicle.

If approved, you will receive a payment schedule along with your loan agreement. Because these loans tend to be small, the loan provider typically asks to be repaid in a lump sum in one month.

However, if you borrow several thousand dollars, then you will likely receive an installment plan over several months or up to two years.

You need to pay your title loan back according to the payment agreement. If you miss enough payments to default on the loan, the title loan company has the right to repossess your car.

So, it’s important to borrow responsibly. Don’t take out the maximum loan amount offered unless you need it.

Should You Try a Title Loan?

Title loans are very tempting when you need $500 immediately. The fact that the loan company doesn’t worry about your credit also relieves stress for people who have low or no credit.

However, title loans aren’t for everyone. The lenders make up for the risk associated with the loans by tacking on an annual percentage rate (APR). You will almost always find that the APR on a title loan is much higher than a credit card or personal loan. And if you miss a payment, it can quickly snowball, and you can owe far more than you borrowed.

With that in mind, title loans do solve a specific problem. Here’s how to tell whether a title loan is a good idea for you.

1. You Understand the Payment Terms

Title loans, like any financial product, come with interest and fees. That means you’re not only responsible for repaying what you borrowed – but often significantly more.

You need to ensure that you understand all of the terms and conditions. You should know what fees are included, when you need to make payments, and what happens if you don’t make the payment.

The loan provider should also go out of their way to make these clear to you. Their contracts should be easy to read and explain. You should stay clear of contracts that try to hide their fees or terms in convoluted sentences or blocks of text. You should also avoid a contract that has clauses that the customer service representative didn’t or won’t explain.

Understanding these agreements is vital regardless of whether you want an auto title loan or a mortgage.

2. You Know You Can Meet the Payment Plan

You should do your best to avoid borrowing money that you don’t think you can repay.

While that sounds like common sense, it’s essential to think strategically, particularly with a collateral loan like a car title loan.

If you don’t have a clear path to repayment for this loan, you can end up spending double, triple, or even quadruple what you initially borrowed.

Unfortunately, customers who borrow an amount they can’t pay back end up on a treadmill of debt as the loan provider rolls over the loan.

Remember that the stakes are also high: you could spend a vast amount on late fees and interest only to lose your car if you still can’t pay it back.

3. You Tried Other Funding Options

Car title loans can help you out in a pinch, but they should be a sort-of last-ditch effort because they are expensive, and there’s a risk of repossession.

Before seeking out a car title loan, consider:

  • Requesting for a credit limit increase on your credit card
  • Applying for a personal loan from your bank or credit union
  • Asking your employer for a paycheck advance
  • Borrowing from a family member or friend you trust

All of these options are less expensive than collateral loans, and none risk the loss of your vehicle if you miss a payment.

Would You Use a Title Loan?

A title loan allows you to borrow against the value of your car when you need cash fast. There’s no credit check required: all you need is proof of employment and a title in your name (only).

These loans can be expensive, but you can manage them by reading the contract, asking questions about terms, and only borrowing when you have a solid plan for repayment.

Did we answer your title loan questions? Get more financial advice from our Money Toolkit.

Posted in: Personal Finance

Top of page