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How Does a Title Loan Work?

Catherine Hiles • March 15, 2024

Money on car, illustrating a title loan

Many of us have found ourselves in situations where we need cash quickly – perhaps you had a medical emergency and need to pay the hospital bill, or maybe you need an unexpected (and expensive) home repair.

There are several ways to access cash when needed, but what if you have a poor credit score and no savings? A car title loan can seem like the ideal solution. But how does a title loan work, and is it a smart idea?

Title loans promise easy access to cash fast, but the downsides include high interest rates and the risk of losing your vehicle, which can cause more problems than they solve. Before going this route, learn more about title loans, their benefits and drawbacks, and the actual cost of this type of loan.

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What is a title loan?

An auto title loan (also called a “pink slip loan”) is a short-term secured loan that uses your vehicle title as collateral. A title loan lets you quickly access funds when needed.

Getting a car title loan can be tempting, especially if you have a less-than-ideal credit score. Title loan lenders often don’t run credit checks, making them appealing to those with “poor” or “fair” credit scores. They are a relatively popular type of loan; in January 2023, 3.7% of American consumers turned to car title loans when they needed a quick cash.¹

However, it’s not all positive – title loans often come with high interest rates and short repayment periods. There are often better ways of getting your hands on money quickly when you need it.

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How does a title loan work?

Title loans use the borrower’s vehicle as collateral to secure the loan. When you apply for a title loan, you must supply the lender with your vehicle title, a photo ID, and proof of insurance. Lenders don’t usually run a credit check, which makes a title loan an attractive option for those with subpar credit.

Once you receive the funds, you’ll have to pay it back within a relatively short period – typically 15 to 30 days.² If you can’t repay the loan within this time frame, the lender will either roll it over to a new loan or repossess the car and sell it to recoup the funds.

You must own your vehicle to qualify. If you’re still repaying your car loan, you’ll have to look elsewhere for funds.

Additionally, you’re unlikely to get a title loan for the total value of your vehicle. Generally, you can borrow around 25% to 50% of the car’s value.² If you default on the loan, you risk losing your car for far less than it’s worth.

Costs of title loans

The cost of a title loan extends beyond the immediate cash it provides. Title loan interest rates are often around 25%, which equates to 300% annual percentage rate (APR).²

For example, borrowing $1,000 for 30 days with a 25% interest rate means you would owe $1,250 in just one month, not including any additional fees.

If you can’t repay the loan within 30 days, you might be able to roll it over to a new loan – but this will add more interest and fees to the amount you owe.

What are the risks and disadvantages of title loans?

A title loan may seem like an easy way to get cash from your assets, but this type of loan carries significant risks – the most notable being the potential loss of your vehicle.

If you can’t repay the loan in the agreed-upon time frame, the lender can repossess and sell your car to recover the loan amount, leaving you without transportation. If you’re one of the 73% of American commuters who rely on their vehicle to get them between home and work, losing your car could result in losing your job.³

Furthermore, the high interest rates and fees associated with title loans can trap borrowers in a cycle of debt. If you can’t repay the loan within the short repayment period, you may need to roll it over into a new one, incurring more fees and interest. This cycle can lead to an unsustainable financial burden.

It’s crucial to weigh these risks and explore other financial options before considering a title loan.

7 alternatives to title loans

A title loan may seem smart when you need money fast, but there are several alternatives with lower interest rates and no risk of losing your vehicle. Consider the following options instead of a title loan.

Payday alternative loan

Payday loans have a bad rap – and for good reason. Traditionally, payday loan lenders used predatory tactics to prey on people who needed a fast influx of cash. Payday loans are banned in some states, but you can get a payday loan from a storefront in others.

Payday alternative loans (PALs) are different. They are offered through credit unions and are regulated by the National Credit Union Administration (NCUA), which caps interest rates at 28%.⁴

You must be a member of a credit union to access a PAL. Since credit union membership is often limited to specific communities or groups (such as military members or employees of affiliated businesses), you may have to shop around to find one that’ll work for you. But if you qualify, a PAL is an excellent alternative to a car title loan.

Learn more about payday loans and other alternatives that can get you cash quickly when needed.

Personal loan

Although personal loan lenders will check your credit score when you apply, many banks and credit unions will approve an applicant with a subpar credit score.

If you have a poor credit score, you’ll likely have to pay a higher interest rate on a personal loan, and the loan term will probably be shorter than if you have good credit. But even so, a personal loan will have more favorable terms than a title loan for someone with bad credit. This makes them a much safer option.

Learn more about how to apply for a personal loan to meet your cash needs.

Credit card

A credit card can be a less costly option for short-term needs, especially if you qualify for a 0% APR promotion. If you have bad credit, it might be harder to qualify for a credit card; however, you may be surprised if you shop around and see what’s out there.

However, if you already have a credit card, using it to cover your expenses in the short term can be an acceptable alternative to a title loan. Find out what else you should use your credit card for.

Family or friends

If you need money fast, you can always ask a family member or trusted friend if they would lend it to you. If you do borrow from family or friends, however, it’s essential to have a solid repayment plan in place. Failure to repay a loan from a loved one can lead to strained relationships in the future.

Debt negotiation

Consider contacting your creditors directly to negotiate your debt. You could qualify for more favorable repayment terms or a lower interest rate. After all, it’s better for a lender if a borrower repays the loan than it is for them to send it to collections.

Tax refund

When you receive your tax refund, consider allocating the money toward your financial needs instead of taking out a loan. You can also use your tax refund to pay down debt.

There are many other smart things to do with your tax refund that can help you improve your finances – but if you need immediate cash, it’s a safe alternative to taking out a title loan.

Assistance programs

Look into government or non-profit programs designed to help those in financial distress. These emergency loans are designed to help people in need pay for essentials, such as rent, groceries, or utilities.

United Way runs a hotline you can call to explore local health and human services programs. Just call 211 to connect and find out about options in your area.

There are better options than title loans for fast cash

While a loan on the title of your car can provide an immediate financial boost, the risks are significant. Title loans are known for their high interest rates and short borrowing periods – and there’s the real possibility you could lose your vehicle. Before opting for a title loan, consider the alternatives and assess all available options.

Learn what happens if you default on a loan so you can make plans to avoid this financial pitfall and keep your finances healthy.

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Chime® is a financial technology company, not a bank. Banking services are provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC. The Chime Visa® Debit Card and the Chime Credit Builder Visa® Credit Card are issued by The Bancorp Bank, N.A. or Stride Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit and credit cards are accepted. Please see the back of your Card for its issuing bank.

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¹ Information from the Consumer Financial Protection Bureau's Making Ends Meet in 2023 as of March 3, 2024: https://files.consumerfinance.gov/f/documents/cfpb_making-ends-meet-in-2023_report_2023-12.pdf

² Information from the Federal Trade Commission's What To Know About Payday and Car Title Loans as of March 3, 2024: https://consumer.ftc.gov/articles/what-know-about-payday-and-car-title-loans

³ Information from Statista's Cars Still Dominate the American Commute as of March 3, 2024: https://www.statista.com/chart/18208/means-of-transportation-used-by-us-commuters/

⁴ Information from the NCUA's Payday Alternative Loans Final Rule as of March 3, 2024: https://ncua.gov/files/agenda-items/AG20190919Item4b.pdf

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