How Title Loans Work

Key Takeaways

• Borrowers can access quick cash by using their vehicle title as collateral for a short-term loan. The borrower receives money in exchange for surrendering the car title to the lender.
• Interest rates on title loans are usually high, often exceeding 240% APR. Borrowers should also be aware of additional fees associated with the loan.
• Unlike traditional loans, title lenders typically don’t perform a hard credit check. This makes title loans appealing to borrowers with bad credit. 

What Are Title Loans?

A title loan, also known as a title pawn, is a short-term loan that uses your vehicle’s title as collateral. In short, you sign over the title of your car to the lender, and they hold it until you repay the loan.

Most title loans range from $1,000 to $10,000 and will be paid back over the course of a month, but there are longer repayment plans offered by some lenders.

Things To Know about Title Loans

• Most title loans range from $1,000 to $10,000 and will be paid back over the course of a month, but some lenders offer longer repayment plans.
• With car title loans, you can continue to drive your vehicle during the duration of your loan.
• Most borrowers take out title loans using their cars, motorcycles, or boats. A title loan on any vehicle or asset will usually be for up to 25-50% of the value. 
• The lending company inspects the vehicle and assesses its value at the start of the loan process.
• Title loans are popular with borrowers with bad credit because they do not require a credit check in order to be approved. Title loans are approved based on the value of your vehicle. 
• The one thing to consider is that interest on the loan can be higher than other loans.

Lender Requirements

There are certain requirements every borrower must meet before getting approved for this type of loan. To qualify for a title loan, you must have a clean vehicle title. This means that your car’s title cannot have any liens on it. In other words, you cannot owe money to anyone for the car. The car has to be totally paid off. 

Most lenders will require you to provide: 

• Clean title
• Running vehicle
• Proof of income
• Insurance (optional)
• Government-issued ID

The second important qualifier is that the car is in good condition. Lenders will need to verify the car, motorcycle, or boat’s main components and make sure everything works before releasing the money.

Besides the condition of the vehicle, borrowers also need to show earned income. However, some lenders are flexible and may approve you for a title loan without income verification. Some lenders will require proof of insurance; however, some will not. Lastly, most title lenders will only do business with customers over the age of 18.

Calculating the Cost of a Title Loan

Here’s how to understand and calculate the true cost of your title car loan. 

1. Find the total interest: Multiply the loan amount by the annual interest rate.
2. Find the total fees: Add up all the origination fees, title fees, and any other potential charges.
3. Estimate the total cost: Add the total interest (from step 1) to the total fees (from step 2).

Here’s a helpful example to illustrate that better. 

Let’s say you borrow $1,000 with a title loan that has a 20% monthly interest rate (240% APR) and a $100 origination fee.

1. Monthly Interest: $1,000 x 20% = $200
2. Assuming a short 30-day term (one month), total interest would be: $200 x 1 (month) = $200
3. Total fees: $100 (origination fee)
4. Estimated total cost of the loan: $1000 (loan amount) + $200 (interest) + $100 (fee) = $1300

Typical Rates & Fees

Title loans or title pawns will have higher interest rates, which will often be written as APR (annual percentage rate).

Interest rates will vary from lender to lender, but interest can range from 25% a month to 300% annually. Besides interest, lenders generally will add origination fees, key fees, document fees, or processing fees into the repayment amount. These fees can add $25 to $50 to the final cost of the loan.

Types of Title Loans

There are multiple vehicle types for title loans. Let’s look at the three most common options below.

Auto Title Loans

An auto title loan is the most common type of title loan. This is the easiest option for borrowers looking for quick cash and their credit report is not ideal. A car title loan allows you to get the money you need, but still drive off the lot with your car. All you must do is stay on-time with your payments.

Motorcycle Title Loans

You can also get a loan on a motorcycle’s title as well. The process is very similar to a car title loan. The motorcycle needs a clean title and also needs to be paid off.

Like regular title loans, motorcycle title loans are known for their fast approval process, often getting you cash the same day or within a few business days.

Boat Title Loans

Motorboats are another vehicle or asset that can be used to get a loan. The same conditions apply as for cars and motorcycles. For boat owners, using the title of their boat might make sense. Some marinas have boats that have not moved in six months, making them an easy asset to use as collateral. Moreover, boats can also be worth quite a bit of money, which might increase the lending limit.

Benefits and Downsides of Title Loans

Before taking out any loan, it’s crucial to understand all its pros and cons. Here’s a breakdown to help you understand the benefits and potential risks associated with title loans. 

Make an informed decision regarding taking out a title loan. Be sure you are in a position to repay it, and you understand all the costs and fees included in your contract.  

Does a Title Loan Affect My Credit Scores?

In most cases, a title loan will not directly affect your credit scores in a positive or negative way.

One of the biggest advantages of these loans is the fact that title lenders typically don’t perform a hard credit check, which is the kind that can slightly lower your credit score for a short period.

However, you should be aware that defaulting on the loan obligates the lender to comply with the Fair Debt Collection Practices Act. That being said, in most cases, the lender will simply repossess your vehicle, and in some instances, it may report the delinquency to credit bureaus, which will lower your credit score. 

For this reason, it’s important to ensure that you can repay your loan on time.

How to Apply for a Car Title Loan

Most direct lenders offer title loans online and make the initial application process simple.

1. You fill out a short online application form, and we instantly match you with the right lender. 
2. After you fill out your information, the lender will usually ask you to drive the vehicle to the physical location for an assessment (although some title loans don’t require the car present to offer you a loan).  
3. If you’re looking to apply without visiting a store, some lenders will meet you at a mutual location or your house.
4. If driving to the store is simpler, there are title locations in most major cities, and you can easily find a location using our title loans near me locator. Just don’t forget to bring your paperwork and the vehicle for inspection.
5. The last part of the process is signing the contract and receiving your money! 

Auto Title Loan Laws

Title loans are an easy way to get cash, but there are various laws regarding this loan throughout the country to keep in mind. Differences in state laws may have to do with maximum loan amounts. For example, in Georgia, the maximum loan amount may differ from Florida.

The rules of repossession will differ from state to state. Some states may give the borrower an extra 30 days, while another state may not. Prohibited practices from lenders will also vary across the country, such as not allowing a balloon payment, which is one very large payment.

Be sure to check your state’s current laws and regulations and understand their implications on your title loan.

What Are Car Title Loans – Final Thoughts

Title loans can provide quick cash in a pinch, but it’s crucial to understand the full cost and risks involved before taking one out.

Still, when you need cash fast and you have a lien-free car title, this option may provide some substantial benefits. You’re not subjected to hard credit scores, money can be on your bank account in a matter of days, and you have complete control over how you spend it. 

Looking for an easy application and quick approval process? Fill out this online application and get your decision in seconds! Trust Titlelo to find you the right lender!

References

“Car Title Loans”, Consumer.gov, 2012, https://www.consumer.gov/articles/1013-car-title-loans

Title Loan: What it is, How it Works, Special Considerations, 2021, https://www.investopedia.com/terms/t/titleloan.asp  

Chad Deatherage

Chad is a seasoned executive with an impressive track record spanning over two decades in the Fintech sector across diverse technologies and financial industries. With a wealth of knowledge accumulated throughout his career in finance & technology, he is dedicated to ensuring that both our employees and clients benefit from the highest levels of expertise and an unwavering commitment to customer service. Chad’s forward-looking approach and exceptional leadership skills have played a pivotal role in the success of his businesses, empowering consumers to proactively navigate the ever-evolving challenges of everyday life. When he’s not charting new horizons in the business world, Chad enjoys quality time outdoors with his wife and kids, as long as the Texas weather doesn’t hit a scorching 110 degrees! 😉

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