Title loans are a form of funding in which you use your vehicle title as collateral in exchange for cash. These are typically short-term, high-interest loans used by borrowers who have bad credit and don’t qualify for other types of personal loans. (In business, title financing is typically used to borrow funds for purchasing equipment.)
Because title loans are secured, there’s a large amount of risk involved for the borrower, who could lose the vehicle if they default. If you’re considering this kind of loan, it’s important to understand how they work and other alternatives you might consider before you apply.
Key Points
• Title loans use vehicle titles as collateral for quick cash.
• These loans typically do not involve a credit check, making them suitable for those with bad credit.
• Repayment terms are usually within 15 to 30 days.
• High interest rates are a common feature.
• Defaulting can lead to vehicle repossession.
How Do Title Loans Work?
Typically, a title loan is a short-term loan that needs to be paid back within a small window of time, often around 15 to 30 days. The application and approval process are easy and may not require a credit check — which should be your first red flag. With a title loan, you have to hand over the title to your vehicle in order to get the cash. You can still drive your car, but it’s in danger of being seized by the title lender if you don’t pay back your loan on time.
Title loans can be found both online and from brick-and-mortar lenders. In order to potentially qualify for title financing, you either need to have substantial equity in the vehicle (as in a very small auto loan balance) or, in some cases, you may need to own the car completely. You can typically apply to borrow up to 25% to 50% of your car’s current value.
Title loans typically include high finance charges that can translate into an annual percentage rate (APR) of 300%, according to the Federal Trade Commission.
Recommended: Guide to Car Loan Interest Rates
Title Loans Vs Personal Loans
A title loan is quite different from online personal loans.
One of the biggest differences is that a title loan is secured, while a personal loan is typically unsecured (in which case it’s also called a “signature loan”). If you default on a signature loan, you may be held liable for the money you owe, but you usually can’t have your assets seized by the lender to repay the balance.
Title financing is also typically much more expensive than a personal loan, with car title loan interest rates reaching triple digits. Plus, you usually have to repay a title loan within 30 days. It’s easy to get trapped in a debt cycle if you can’t make the full payment by that time. You may be able to roll over the loan balance, but you’ll usually incur hefty fees on top of an APR that can already be sky-high.
An unsecured personal loan, on the other hand, typically has a fixed rate and a longer repayment period. Your payments may be more affordable because they’re spread out over time. You may incur late fees if you miss a payment, but you don’t have to worry about rolling over your balance — most unsecured personal loans don’t permit the practice.
When to Consider a Title Loan
Title loans are typically used by people with bad credit who can’t get financial assistance anywhere else. The funds are often used to cover an emergency.
Generally, a title loan is considered only as a last resort. You should also explore all of your other options before seriously considering title financing for personal use. And it’s certainly not a good idea to take one out for anything that’s not absolutely necessary.
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Using Title Loans for a Business
Title loans for business work differently than standard personal title financing. Also called equipment financing, this kind of loan allows companies to borrow funds to purchase equipment. Many commercial industries use equipment, from the bulldozers a construction company may need to the kitchen equipment a restaurant might use to the computers an accounting firm might rely upon. Any of these businesses might take out an equipment loan to purchase these necessities. The equipment is then used as collateral for the loan.
Equipment financing rates are typically available with more favorable terms than title loans. Lenders may view these loans as less risky since there’s collateral. Plus, the business generally has to undergo an application process and financial review to make sure the payments are affordable. You may have anywhere from months to years to pay the loan back, depending on the lender.
It is possible to get business equipment financing with bad credit, but rates are typically higher than borrowers with good credit. Lenders may also review how long a company has been in business when determining whether or not to extend the loan offer.
You can usually see the minimum application requirements on a lender’s website so that you can compare equipment financing companies and apply for the business loans most suitable for your needs.
Pros and Cons of Title Lending
Here’s a closer look at the pros and cons of title lending. The negative aspects of title lending can outweigh the positives.
Pros of Title Loans
• Typically no credit check is required, meaning those with bad credit can secure funding
• Quick access to money
Cons of Title Loans
• High interest rates and fees
• Must be repaid in a short timeframe
• Requires that you own your car in full or at least have significant equity in order to qualify
• The lender may also require a GPS device to be installed in your car. In the event that you don’t repay the balance, this lets the lender track your vehicle’s location in order to seize it.
• While you might be able to roll over your loan into another repayment cycle, you’ll then continually accrue fees on top of the original principal and interest, adding to the debt burden.
• Your vehicle can be seized if you can’t make loan payments.
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Alternatives to Title Financing
When you’re stuck in a financial pinch, you may want to consider all of your other options before taking out a title loan. Here are a few to consider:
Cash-Out Auto Refinancing
If you have an active car loan, cash-out auto refinancing can be a way to borrow money by using the equity you have in your vehicle. You could also potentially get a lower interest rate on your auto loan as well.
Contact Creditors
If you’re undergoing financial hardship and having trouble making payments on your normal bills, reach out to those creditors. You may be able to work out a temporary reprieve in payments or modify loan terms to pay off your debt.
Consider a Credit Card Cash Advance
If you have a credit card that’s not maxed out, you could potentially take out a cash advance. This is not often advised, however. Compare the fees and terms to your other options because you’ll generally be charged a higher APR (annual percentage rate) than your standard credit card interest rate.
Explore Local Bank or Credit Union Loans
Another option is to look for small, short-term loans at local or regional banks and credit unions. You’ll probably be more likely to be approved if you’re already an account holder at the financial institution.
Recommended: How Does PreApproval Work?
The Takeaway
A title loan uses your vehicle’s title to secure a loan. You receive a portion of your car’s equity, usually at a high rate of interest for a short period of time. If you default, the lender can take your car, which serves as collateral. Because of the risk of losing your car’s title and the challenge of paying a high interest rate, it may be best to avoid a title loan and look for alternatives. For instance, if you have an active car loan, cash-out auto refinancing may be an option to explore.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
Is a title loan ever a good idea?
Car title loans can seem like a convenient option for getting fast cash, but they come with high interest rates, short terms, and the risk of losing your vehicle. For this reason, exploring your options can be a smart move.
What are title loan disadvantages?
There are several key disadvantages to title loans including the high interest rates (up to 300% per year), short repayment terms (often, a month or less), and the risk of repossession if you default on your loan.
What is the most you can get for a title loan?
Typically, title loans will pay out 25% to 50% of the vehicle’s value. The average amount loaned in this way is approximately $1,000, but the range can be from $100 to $10,000.
Photo credit: iStock/Dmytro Skrypnykov
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