What are car title loans & what are the risks?

Car title loans are one type of fast funding that carry a steep price in terms of interest and fees. These short-term, high-interest loans put you at risk for losing your car if you can’t repay them. Here’s how they work and other options to consider.

How car title loans work

Financial snafus can happen to anyone. You wind up with an unexpected medical expense. Your work hours are cut. Your washing machine breaks down. Surprise expenses or income shortfalls might have you considering getting a car title loan.

Car title lenders operate both online and out of brick-and-mortar locations. Many states don’t allow car title loans at all, and of those that do, some place bigger restrictions on the lenders than others.

To get a title loan, you need to show the lender your car title, proof of insurance and a valid ID. In some cases, you’ll need to own the car free and clear; in others, you may be able to get a loan even if you still owe money on the car. Some title loans won’t require a credit check or proof of income.

If you’re approved for the loan, the lender will give you the money and hold onto your car title as collateral (you can still keep driving your car). The average size of a title loan ranges from 20% to 50% of your car’s value.

You’ll be charged a monthly interest rate on the loan that can be as high as 25% of the amount you borrowed. That works out to be the equivalent of a 300% APR. Some states regulate how much interest title lenders can charge, but many don’t. You’ll also probably be charged other fees like a title certificate fee. 

Title loans have to be repaid very quickly — usually within 30 days or less. If you can’t repay the loan by then, you can roll it over, but you’ll be charged another monthly fee, which will happen each time you roll it over. “That makes it incredibly expensive dough to access,” says debt relief expert Michael Bovee, co-founder of Resolve.

For example:

• You borrow $1,500 for 30 days
• You’re charged a 25% monthly fee
• After 30 days, you owe $1,875, which means you paid $375 worth of interest in just one month. 

What happens if you default on a car title loan?  

If you default on a car title loan, the lender can repossess your car. A Pew Charitable Trust study found that between 6% and 11% of borrowers have their cars repossessed. Of those people, about 15% to 25% actually get their cars back after they repay the loan, plus additional fees.

Losing a car can be a major blow, especially considering that 35% of the people who take out a title loan only have one working car in their household. That’s one of the many reasons Bovee tells people to avoid car title loans “at all costs.”

“You have to think about what happens if the other shoe drops and you put your car at risk. How are you going to get to work or get the kids to school?” he says.

What you can do instead of a car title loan

The reasons people turn to car title loans are because a) they’re fast and b) they typically don’t require good credit or even proof of the ability to repay the loan. Bank loans, on the other hand, take much longer and you usually need a healthy credit history and credit score. But Bovee strongly recommends looking at other options.

“Always look to your circle of influence first. Talk to a local credit union. They’ll often work with you even if your credit isn’t super great,” he says. “See if you can borrow money from a friend or family member. If you belong to a faith-based organization, many of them will help out members of their congregation. In those cases, you’re talking to people who love you and care about you rather than a loan shark.”

If you have decent credit, you might qualify for an unsecured personal loan. There are also a few online lenders who give out loans to people with bad credit, or you might ask your employer about a cash advance. 

Related article: The pros and cons of secured and unsecured personal loans

The danger with car title loans is that they’re very expensive and have such a short repayment window. If you can’t repay the loan, rolling it over means racking up more fees and interest. That makes it even harder to repay the loan, a vicious cycle that could end up with you losing your car.