How Do Car Title Loans Work?

There are different reasons you may need a loan. Maybe you need to catch up on bills or have an emergency. Perhaps you need 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. Bad credit or no credit can have you evaluating options, including car title loans.  

What Are Car Title Loans?

Car title loans are secured short-term, high-interest loans that allow borrowers to use their car as collateral. A car title loan can also apply to other vehicles, including trucks, boats, recreational vehicles, and motorcycles. 

Car title loan limits tend to range from $100 to $5,500, generally 25% to 50% of the vehicle’s cash value. Loan terms are usually 15 to 30 days, after which the borrower repays the loan, plus fees and interest, and reclaims the title, lien-free. 

These loans usually have few requirements, and lenders don’t consider credit scores. To receive a car title loan, you simply need a clear title — 100% ownership of the car, without any liens — or equity in your vehicle. 

How Do Car Title Loans Work?

Let’s say your car is worth $7,500. You face a medical emergency and need $2,000. If 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. 

How Does a Car Title Loan Help?

These loans are an attractive option for borrowers for multiple reasons. They can be especially helpful during an emergency.

Car title loans are helpful 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. There is no change in your routine, and you get the money you need. 

When weighing options, consider these loan challenges: 

  • High-Interest Rates and Fees. Car title loans have higher interest rates, finance charges, and fees than traditional loans. 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.
  • 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, which isn’t much time to find the funds to repay the money you borrowed.
  • Potential Loss of Your Car. If you don’t pay back the loan, you’re at risk of losing your vehicle. Lenders often take additional steps to reduce their risk, such as installing GPS trackers on the car or requiring you to give them a set of keys to assist in potential repossession.

Car Title Loan Qualifications

In most cases, to obtain the loan, you will need to own your car outright or have a nearly paid-off vehicle. 

Lenders also require:

  • Original vehicle title 
  • Government-issued identification 
  • Utility bill or other proof of residency 
  • Vehicle registration
  • Proof of vehicle insurance
  • Recent pay stubs 
  • Proof of employment 

Alternatives to Vehicle Title Loans

You may want to consider alternatives instead of a car title loan. Many borrowers renew their car title loan multiple times and don’t have a realistic plan for paying it off. Without a way to repay the loan before it’s due, you could pay higher than expected fees, making it a more expensive option. 

Instead of a car title loan, consider:  

  • Payday 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. Federal credit unions typically cap interest rates. And credit unions tend to work with you to find a solution, even if you don’t have excellent credit. 
  • Personal Loans. You can get unsecured loans from banks, credit unions, or online lenders. They typically have lower interest rates and better terms than vehicle title loans, but you’ll want to compare rates and terms. And since they’re unsecured, you aren’t putting your vehicle at risk. 
  • Credit Card. 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. But 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 less to pay back. 

FFCU Provides You Options  

If you own your vehicle outright, understand the cost of the loan, and can repay the loan before the repayment period expires, a car title loan may work for you. Focus Federal Credit Union can help you determine the right loan for you. Call an advisor or check out the website to calculate your car title loan in minutes.