How they work, cost, alternatives
- Title loans use your car as collateral, which means the lender can repossess your car if you don’t pay.
- Title loans often have to be repaid within 15 to 30 days and charge interest rates of 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 title as collateral when you borrow money. This means the lender can repossess your car if you don’t repay your loan on time. Many title lenders don’t consider your credit history at all when making lending decisions.
If you’re in a bind, have poor credit, and need cash fast, a title loan might seem like an attractive option to get your money. But title loans have significant drawbacks. Title loans are risky because they charge high fees and you risk losing your car if you are late paying.
Title lenders typically target borrowers with low credit scores or minimal credit histories who cannot qualify for lower-cost loans elsewhere.
“In an ideal world, no one would take out a title loan,” says Evan Gorenflo, senior financial advisor with the personal finance app Albert. “It’s not something you typically associate with progress or a financial goal. Rather, it’s designed to help you through a desperate time.”
What is the cost of a title loan?
Title loans generally have interest rates equivalent to 200% to 300% APR. A title loan generally 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 typically have maximum APRs around 36%.
“Home loans are tricky because a lot of people rely on their car to make money,” says Gorenflo. “In that situation, you’re giving up your title as collateral. Sometimes you give them a second set of keys to your car, they put the GPS in your car in some cases, so you’re really making it easier for them to confiscate your car if you are unable to repay this amount.”
How much can you borrow with a title loan?
The range you will be able to borrow depends on your personal circumstances, but generally lenders will allow you to borrow between $100 and $10,000. The usual loan term 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 is worth $10,000, they won’t let you borrow all that. Sometimes it’s 25% of your capital limit. Some lenders will actually ask you to own your car before giving you a title loan. Each lender will operate a little differently.
Advantages and disadvantages of title loans
What are the alternatives to title loans?
If you need money to pay for expenses such as utility bills, credit card payments, or rent, try contacting your creditors to set up repayment plans that don’t require you to take out a loan. You never know what options might be available to you unless you reach out and ask.
Other alternatives to title lending include asking friends for money, joining side gigs from ridesharing apps, or contacting local charities or religious organizations. If you qualify, you may want to take out a credit card or personal loan with a lower APR than a title loan. You will still borrow money, but it will cost you less in terms of interest.
“If you need money fast, if you need to make $200, you can do it in a weekend with Uber,” says Gorenflo. “Even if it’s a little more wear and tear on your car, if it saves you from taking out a loan at 300% interest, it could definitely be worth it.”