How Do Car Title Loans Work?

You may need a loan for different reasons. You may need to catch up on bills, have an urgent expense, or have an emergency. You may require extra money to make it through to the next payday. But getting a loan can be difficult, especially if your credit history isn’t pristine. 

Car title loans can be a way to get fast cash if you own your vehicle outright, even if you have poor credit or no credit history. They are a short-term personal loan in which you pledge your car as collateral. 

But they carry a lot of risk, including the potential loss of your vehicle. 

Keep reading to learn how car title loans work, what you need to know about car title loans, and other options to consider before signing on the dotted line.

What Are Car Title Loans?

Car title loans are secured, short-term (usually 15 to 30 days) high-interest loans with few or no credit requirements, allowing you to secure a loan using your paid-off car or vehicle as collateral. 

Although generally called “car title loans,” they are actually “motor vehicle title loans.” They can be used with trucks, boats, recreational vehicles, and motorcycles. 

They tend to range from $100 to $5,500, generally 25% to 50% of your vehicle’s current market value. In return, you agree to pay the loan balance plus interest and fees when the loan term ends and you reclaim the title, lien-free. 

Car title loans usually have few requirements, and lenders don’t consider credit scores. And during the loan period, you can still drive the vehicle, but the lender will hold on to your title. 

Certain lenders will require you to turn in an extra set of keys or keep a GPS tracker in your car for the duration of the loan. And if you don’t pay back the loan on time, they can repossess your car or vehicle and sell it to get the money back.

How Do Car Title Loans Work?

So, you may be wondering, how do car title loans work? Let’s say your car is worth $7,500. You face a medical emergency and need $2,000. You own your vehicle outright and have a lien-free car title. You can apply for a car title loan through a lender. You need to show proof of ownership, vehicle information, and your license. Once approved, you hand over your car title and receive the $2,000 loan. 

Terms of repayment vary by lender and include single-payment and installment options. With a single-payment loan, you pay the total amount of the loan plus the interest at the end of the loan term, typically 15 to 30 days. If your loan has installment payments, you pay back the loan in increments based on lender requirements, usually three to six months. 

Who Can Get a Title Loan?

Car title loans cater to people with past credit challenges who need fast cash. In most cases, to obtain a loan, you will need to own your car outright, meaning you’re not making auto loan payments on it or have a nearly paid-off vehicle. 

The application process is typically straightforward, since there are no credit requirements. To apply, you need to visit a lending office or an online lender. When you apply, you’ll need to provide:

• Original vehicle registration and clear title
• Valid government-issued ID
• A utility bill or other proof of address
• Recent pay stub and employment verification
• Vehicle insurance documentation.

You’ll sign a loan agreement outlining the terms, fees, and repayment schedule. The lender takes your paper title while placing a lien on it. You’ll receive the funds by cash, check, or direct deposit. You continue driving your vehicle as usual.

Most title loans require repayment in a single lump sum at the end of the term or with installment payments. Payment methods can include cash, check, money order, or electronic transfer. Once you’ve fully repaid the loan, the lender releases the lien and returns your title. If you can’t pay on time, lenders may offer rollover options that come with additional fees. 

Car title loans are an attractive option for borrowers because they:

• Require No Credit Check. Title loans don’t require a credit check, which is positive if you have a few bumps in your credit history.  
• Provide Quick Approval. Since there’s no credit check, lenders only take a few minutes to review your application and collateral vehicle. After approval, you can receive funds within a couple of days.
• You Keep Your Car. Although you use your vehicle as collateral, you keep the car and drive it. You won’t have to change your routine, and you get the money you need. 

What Happens If You Can’t Repay?

While title loans can offer a quick and easy way to access cash, they also come with catches to be aware of before you sign on the dotted line. One of the most significant downsides is the possibility of losing your vehicle. 

With a car title loan, you will face high interest rates and fees. They are expensive and can put you in a cycle of debt, placing you in a worse financial position. Car title loans have higher interest rates, plus you might have to pay extras like loan processing, documentation, and origination fees.

Costs typically include an average monthly finance fee of 25%. For example, on a $2,000 loan, you’ll pay an additional $500 in interest if you repay within the loan time and more if you extend the loan term. 

Another drawback to car title loans is their short repayment terms. Traditional loans typically have repayment terms of six months to three years. Car title loans usually require repayment within 15 to 30 days. 

Lenders often offer loan rollover options, but these usually come with added fees and higher interest rates, snowballing you further into debt. After a certain number of rollovers, the lender will repossess your car. 

If you are already struggling with making ends meet, short loan periods can make it challenging to repay the loan and the financing fees in such a short period of time. Rollovers and extensions can trap borrowers in long-term debt.

Smarter Alternatives to Title Loans

Title loans are often an easy way to get the money you need quickly. Even if you find yourself in a dire financial situation, without an emergency fund and with a credit score that could use a bit of improvement, consider an auto title loan as a last resort and seek out other solutions. 

Instead of a title loan, consider:  

• Alternative loans. These are small-dollar loans offered by federal credit unions. They’re like title loans, but don’t require collateral. Lenders require proof of income, but unlike traditional payday loans, credit unions give you additional time to repay. Loans range from $200 to $1,000 and typically have capped interest rates. 
• Personal loans. You can get unsecured loans from banks, credit unions, or online lenders. Although certain personal loans can be expensive and have shorter repayment terms, they’re still a better option than title loans, and they don’t come with the risk of losing your vehicle. 
• Credit Cards. A credit card approves your spending up to a specific limit, which you can use as needed. You repay your balance every 30 days, and unpaid balances accrue interest. Credit cards have lower interest rates than title loans, costing you less. Often, credit cards even offer no-interest financing periods. Using an offer like this is a way to finance smaller loan needs with lower repayments. 

Loans Made Easy at The Focus Federal Credit Union

Car title loans are a convenient option for getting fast cash, but the costs are usually not worth the risk. You could end up in a far worse position than you were before taking out the loan. 

The Focus Federal Credit Union can explain how car title loans work, and offer personal loans and other lending options with fair rates, transparent terms, and no hidden surprises. 

TFFCU can help you find the right path to financial success and determine the right loan for you. Contact us today to learn more. 

Aiden Ferguson

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