Title Loans: Definitions, Risks And How They Work

If you have an emergency and need cash fast, short-term loans can help you out in a pinch. One option is a title loan, which at first may sound like just what you need, but there’s actually a lot to consider.

Let’s take a look at the ins and outs of title loans, how they work and what exactly you’re signing up for with one.

A title loan, specifically a car title loan, is a short-term secured loan that often has few or no credit requirements to borrow. The loan is secured using the title of your car or vehicle as collateral, which the lender holds until you pay the loan completely off.

The loan amount you can borrow will depend on your lender and your car’s value. Lenders typically set the loan limit to 25% – 50% of your vehicle’s value, so you could reasonably borrow anywhere from $100 to $10,000.

Getting a title loan is also dependent on where you live, as most states don’t allow title loans at all. Find out if title loans are legal in your state before going any further in the process.

Applying for a title loan is relatively fast and easy, and its status as a same-day loan means you can be approved and receive your funds the same day you apply. When you meet with a lender for the application process, you’ll need to bring the following:

• Your car or vehicle
• A title that proves your ownership of the vehicle
• Your photo ID or driver’s license
• Proof of insurance

Some lenders may still run a credit check, but your title will typically be enough to secure the loan. Once approved, you’ll hand over your title to the lender, and they’ll hold onto it for the duration of the repayment period, typically 15 – 30 days but sometimes longer.

Even though you’re giving the lender your title, you can still drive your car or vehicle for the length of the loan term, and – assuming you repay the loan in full – continue driving the car once you’ve paid off the loan. But if you can’t make your payments or default on the loan, the title lender can legally take your vehicle.

A major drawback of title loans is how much they can cost you in interest rates and fees.

Most title lenders will charge a 25% monthly rate for the loan, amounting to an annual percentage rate (APR) of about 300%. If you can’t repay the loan in 30 days and have to roll the loan over into the next month, you’ll be charged an additional 25% of your loan amount as a finance fee. So if you borrow $1,000, that’s an additional $250 for the loan. If you have to roll over the loan, that’s another $250, making your balance $1,500.

Because of the exorbitant fees and short repayment periods, you can end up trapped in a cycle of debt.

On top of these additional costs, you can lose your car if you default on your loan. And if you depend on your car for getting to work, this can further jeopardize your financial situation. 

As a type of emergency loan, car title loans are often sought out by those who need fast cash. However, in most cases, borrowers tend to lose more than they gain when taking out title loans.

A 2016 study by the Consumer Financial Protection Bureau (CFPB) found that one in five borrowers have had a vehicle seized by a lender after failing to repay their loan. Additionally, a 2019 survey revealed that over 80% of borrowers had rolled over or borrowed again soon after paying off a title loan.

If you’re considering a title loan, it’s important to weigh the benefits and drawbacks. Let’s review some below.

Pros

• Fast approval and funding: Title loans can be approved and funded the same day you apply, which is good if you need immediate cash.
• No or few credit requirements: Since your car title secures the loan, the strength of your credit score isn’t as much of a factor with title loans as it is with other types of loans.

Cons

• High interest and fees: The high interest rates, plus rollover fees, can cost you even more when you’re already stretched for cash. Constant rollovers can also trap you in a cycle of debt.
• Short loan terms: A 15 – 30-day repayment period may not be enough time for some people, forcing them to roll over the loan and pay another 25% financing fee.
• You risk losing your vehicle: Ultimately, the greatest risk with a title loan is the lender seizing your vehicle, leaving you without transportation.

Depending on your situation, a title loan may not be your only option for a loan. Consider these financing alternatives before committing to a car title loan.

Personal Loans

You can borrow a personal loan from a traditional bank, credit union or online lender, and it will be disbursed to you in a lump sum for you to repay it in monthly installments. Personal loans are typically unsecured – meaning they don’t require collateral – and you can use them for various reasons.

Since personal loans are unsecured, your eligibility and rates will depend heavily on your credit score and debt-to-income (DTI)ratio. Bad credit won’t necessarily disqualify you from getting a personal loan, but your rate will be better with a higher credit score.

Getting a personal loan involves a prequalification, multiple credit checks and a full application before you can be approved. It can take 1 – 7 business days to approve your loan and disburse your funds. Some lending platforms, like Rocket Loans℠, can even offer same-day funding to certain applicants.*

Home Equity Loans Or HELOCs

Similar to personal loans, home equity loans are lump sum installment loans you can use for almost anything. However, you secure this loan by borrowing against the equity built up in your home, meaning your house is your collateral. If you fail to make your monthly payments, you can lose your home.

You can also borrow against your equity with a home equity line of credit (HELOC). Instead of a lump sum, you’re granted a line of credit to borrow money from and repay over time. Again, though, your home is on the line and at risk of foreclosure if you can’t keep up with your payments.

Payday Loans

Like title loans, payday loans can be approved and funded the same day you apply, and they carry few if any credit requirements, making them ideal if you have bad credit. These loans also don’t require any collateral.

Payday loans come with even shorter terms than title loans but have repayment periods of 1 – 2 weeks, or whenever you receive your next paycheck from your employer. Many payday lenders allow rollovers but with fees similarly high to title loans.

Credit Card Cash Advance

With a cash advance, you can use your credit card to make an immediate cash withdrawal from a bank or ATM, and the borrowed amount gets added to your credit card balance. This doesn’t make it free money, unfortunately, as a credit card issuer may impose a 3% – 5% service charge for a cash advance. Another downside is that a cash advance starts accruing interest from the moment you make a withdrawal, allowing no grace period.

Military service members and their dependents can receive some protection from the high APR of a title loan. The Military Lending Act limits the APR a lender can charge to 36% for loans with terms of 181 or fewer days. The law also prevents title lenders from accessing your bank account and requires them to inform you of your borrower’s rights, as well as the full costs of the loan upfront.

In an emergency, you may have to act quickly to secure funding. While a title loan can get you cash fast, it can cost you so much more if you default or have to roll over the loan. With such financial risk attached to title loans, plus the possibility of losing your vehicle, it may be best to consider other options – but it really all depends on your situation and individual borrowing needs.

If a personal loan sounds like it might work better for you, you can apply online today with Rocket Loans to find the rates and terms for which you may qualify.

*Same-day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same-day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.