Title Loans: A Double-Edged Sword for Subprime Borrowers

What is a Title Loan?

A vehicle title loan is a secured loan that does not review a borrower’s credit history during its approval process. Also known as a title pawn, pink slip loan, or title pledge, title loans offer an alternative lending option to more than two million American adults each year.¹ These short-term loans are typically due in thirty days but can be extended with either an installment plan or by “rolling over” the principal balance to the next month.

Rolling over the balance can result in a balloon payment (often the entire principal) at the end of several interest-only payments. When vehicle title loans are cited as having high APRs, it is often due to this calculation. Rolling over a single-payment monthly interest fee of 25% will result in a 300% annual percentage rate, so keeping the length of the loan as short as possible is in the borrower’s best interest.

How Much Can I Get for a Title Loan on my Car?

The amount of a title loan is dependent on the value of the vehicle , as determined by the lender’s inspection. The Federal Trade Commission notes that title loans usually offer borrowers 25-50 percent of the car’s value, but the Consumer Financial Protection Bureau (or CFPB) reports that lenders may take sentimental value or value of use into consideration when determining the loan amount.²

The CFPB also summarized from personal statements, reports from lenders, and official surveys that “income smoothing” was a frequent reason for consumers to seek short-term loans. Whether borrowers experience income volatility because of non-traditional employment, seasonal, or variable work or paychecks, or they must cover expenses that exceed their current funds, they will be able to obtain approval for a title loan just by presenting the title to their vehicle. Because title loans are secured by an asset, underwriting has not always included the consideration of the borrower’s ability to repay the loan. Many states have self-regulated for this, and companies like loan brokers and credit counselors can provide more guidance on the maximum loan amount recommended for a consumer based on their income and expenses, rather than solely based on the assessed value of the vehicle.

What are the Benefits of Title Loans?

The Consumer Financial Protection Bureau reported on a survey that found 44% of respondents would have to borrow money or sell something if they were presented with a $400 emergency expense.³ This consumer need for access to fast cash is satisfied by a short-term loan, like a title loan, which often has a fast approval process , high approval rate , quick fund disbursement , and with little to no impact on the borrower’s credit report or lifestyle.

In general, a valid photo I.D. and a vehicle with an (ideally clear) title are all that is required to be approved for a vehicle title loan. Depending on both lending requirements and state regulations, other documents may be required, such as proof of car insurance or income. The requirements for income are particularly flexible with title loans, and traditional employment is not necessary. Though a bank account may be required to transfer funds directly to the borrower, no bank is required for loan approval, since funds may also be disbursed via check.

Car Title Loan Requirements

• Lien-free Car Title
• Government Identification
• Proof of Insurance (optional)
• Proof of Income (optional)
• Vehicle Registration (optional)

Due to the minimal requirements to obtain approval and the asset-based nature of title loans, they have a very high approval rate. Once the car is inspected and its value is determined, the loan amount is finalized, and funds are disbursed. Since quick access to cash is a major marketing advantage of title loans, funds are often disbursed the same day the loan is approved. The lender’s operations and the borrower’s preferences will determine how long fund disbursement takes in most cases.

Do Lenders Check Your Credit for a Title Loan?

Vehicle title loans are secured with collateral, so they do not require a credit check for loan qualification or approval. The National Director of the Center on Finance, Insurance and Real Estate, Eli Lehrer, stated that title loans were “a good way for some people with few assets to get money and, in many cases, can be less expensive than the alternatives,” which he compared to credit card non-payment fees.⁴ As long as the loan does not go into default, the borrower’s credit will never be impacted, and he or she will continue to drive the vehicle during the entire length of the loan.

What are the Disadvantages of Title Loans?

The most obvious drawback to a title loan is the threat of repossession. Though the borrower retains possession of the vehicle while the loan is in good standing, the lender withholds the title in case the loan becomes past-due, and the lender has to claim ownership over the vehicle legally. Some lenders require a starter interrupter device or GPS installed in the car to facilitate repossession in case the borrower does fall behind on payments. Though it is not legal in some states (like Wisconsin), there are also lenders who may require a copy of the vehicle’s key as well.

What Happens If You Don’t Pay a Title Loan Back?

While some borrowers may use the consequence of repossession as motivation to make timely payments, there is still a small percentage of consumers who lose their vehicle to repossession due to defaulting on their title loans. As explained by the Pew Charitable Trusts, the lender may seize possession of the vehicle if the loan becomes past due, but the borrower will have the opportunity to reclaim the vehicle by paying off the remaining balance of their loan. Even though the rate of repossessions can be reported as high as 20%⁵, the percentage of people who permanently lose their car is less than half of that (4-9%) in a given year. The decision to repossess a car is not often so clear-cut as late payments, though, and the Consumer Financial Protection Bureau found that “lenders are unlikely to repossess vehicles they do not expect to sell.”

High interest rates are also a concern to borrowers seeking short-term loans, and monthly interest fees can quickly add up to pretty substantial APRs. According to the Federal Trade Commission, annual percentage rates are based on the borrowed amount, monthly interest rate, total amount of fees, and the length of the loan.⁶ Though the average monthly interest rate (25%) can seem low for a single-payment loan, the cost would double if the loan was extended (or “rolled over”) to the next month. The CFPB found that most title loans are not repaid in a single payment, but rather stretch to at least four loans. The CFPB also reports that the negative consequences faced by borrowers of title loans result from “failing to underwrite such loans by making a reasonable assessment of the borrower’s ability to repay the loan according to its terms.”

Title Loan Regulations

There is substantial public support from consumers and consumer advocacy groups to increase regulations on short-term loans and longer-term balloon payment loans. Stricter underwriting processes that focus on the borrower’s ability to repay and more options for amortizing (principal-reducing) installment loans are the two most commonly discussed topics.

States That Allow Title Loans

• Alabama
• Arizona
• Delaware
• Florida
• Georgia
• Idaho
• Illinois
• Kentucky
• Mississippi
• Missouri
• Minnesota
• Montana
• Nevada
• New Hampshire
• New Mexico
• Oregon
• Rhode Island
• South Dakota
• Tennessee
• Texas
• Utah
• Virginia
• Wisconsin
• California
• Kansas
• Louisiana
• South Carolina

Of the states that allow vehicle title lending, most offer both single-payment and installment options for title loan terms. Many states have legislation that requires lenders consider the borrower’s ability to repay during the underwriting process. Using a loan broker or other financial advocate can also ensure the consumer is adequately informed and protected from high-risk loans. The Pew Charitable Trusts recommends “small-dollar” loan amounts not exceed 5% of a borrower’s monthly income as a basis for determining the affordability of the loan and the borrower’s ability to repay. This recommendation can be overruled by careful underwriting that accounts for the borrower’s income and expenses.

Regulations for vehicle title loans vary by state (and even municipality), so borrowers who take time to compare lenders have the opportunity to save money and obtain better terms. These regulations are typically beneficial to the borrower and may include maximum loan amounts and mandatory amortization. There are also other lending options consumers may consider alongside title loans.

Comparing the Alternatives

Vehicle title loans are often compared to auto pawns, but the Federal Trade Commission considers it more closely related to payday lending, though the interest rates are typically lower with title loans.⁷ While the business model of payday lending may be similar to title lending, the self-liquidation of title loans is similar to that of auto pawns. Unless more is owed than the vehicle is valued, repossession of the vehicle within a title loan would absolve the debt, like the retention of the vehicle from an auto pawn. Title loans, payday loans, and pawn lending can often be attractive options to consumers who wish to avoid credit checks.

Those who do not mind an additional line of credit may compare traditional loans from banks or credit unions. Federally chartered credit unions may also offer ” payday alternative loans ,” which may include lower interest rates than private payday lenders. Though borrowers often need to have excellent credit, bridge loans are options for consumers that are looking for gap or interim financing, usually when purchasing a new house while still mortgaging another one.⁸ Traditional loans and credit cards may be reasonable options for consumers with good credit but may take longer to provide access to funds than the above options.

Title Loans versus Other Short-term Loans

Depending on many circumstances, a consumer may consider a loan from family or friends but is advised to negotiate interest rates, fees, and terms and document everything for both parties. For late payments on bills and outstanding debt, first try to contact the payee to request an extension on the payment. An open, honest conversation about a consumer’s ability to pay a bill or debt can sometimes be all it takes to negotiate a payment plan that works for both parties. Active, reserve and retired military have additional options for financial assistance and can contact the Department of Defense 24 hours a day, 7 days a week at 1-800-342-9647.

What Borrowers Need to Know

When selecting a title loan, consumers should familiarize themselves with the regulations for short-term loans in their area to ensure lenders are providing fair rates and options. Lenders should provide consumers with the total cost of the loan including all fees, terms, due dates, and the APR. To select the best lender, consumers may compare the APR, fees, how soon they must repay, and the consequences of not paying in order to select the best lending option for them.

Consumers should note if lenders charge any of the following fees (as well as the interest fee): processing, document, or loan origination fees, late fees, title charges, or other lien fees. Consumers should also inquire whether there are any mandatory add-ons for the loan, such as a roadside assistance plan.

How Borrowers Feel About Title Loans

According to Pew Charitable Trusts, “seven in ten title loan borrowers report that they rely on lenders to provide accurate information about the loans.” While this can be an expedient path to access cash from any loan available, it may not be the most beneficial to the borrower. Credit counselors, financial advisers, and loan brokers can provide impartial services to consumers who need cash fast, but still want to select a trustworthy lender with competitive rates and reasonable terms. To steer clear of predatory lenders, consumers may invoke the aid of a financial professional to explain their choices and assist them in locating the proper lending option for them.

Vehicle title loans certainly have their advantages: high approval rates, fast access to cash, no credit check, and continued access to the vehicle. However, they also pose the threat of repossession if the borrower were to default on the loan and interest rates can be high, even though the loan is secured with collateral. To make the proper choice for a short-term loan, a consumer should gather as much information as possible and understand their options completely.

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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1. “Auto Title Loans.” Pewtrusts.Org, 2015,
   http://www.pewtrusts.org/~/media/assets/2015/03/autotitleloansreport.pdf
2. “Payday, Vehicle Title, And Certain High-Cost Installment Loans.” The Bureau of Consumer Financial Protection, 2017,
   http://files.consumerfinance.gov/f/documents/201710_cfpb_final-rule_payday-loans-rule.pdf
3. “Car Title Loans.” Federal Trade Commission, 2017,
   https://www.consumer.ftc.gov/articles/0514-car-title-loans
4. Reed, Philip. “Beware Of Car Title Loans.” Edmunds, 2011,
   https://www.edmunds.com/car-news/tips-advice/beware-of-car-title-loans.html
5. “CFPB Finds One-In-Five Auto Title Loan Borrowers Have Vehicle Seized For Failing To Repay Debt.” Consumer Financial Protection Bureau, 2016,
   https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-one-five-auto-title-loan-borrowers-have-vehicle-seized-failing-repay-debt/
6. “Car Title Loans.” Consumer.Gov, 2017,
   https://www.consumer.gov/articles/1013-car-title-loans#!what-it-is
7. Martin, Nathalie, and Ozymandias Adams. “Grand Theft Auto Loans: Repossession And
   Demographic Realities In Title Lending.” Missouri Law Review Vol. 77, 2012,
   https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2041575
8. “Bridge Loan.” Investopedia, 2017,
   https://www.investopedia.com/terms/b/bridgeloan.asp