Table of Contents
What Is A Car Title Loan?
How Do Car Title Loans Work?
16 Loan Options to Avoid Title Loans
1. Use A Credit Card Cash Advance
2. Apply For An Unsecured Personal Loan
3. Apply for a Payday Alternative Loan
4. Are You Owed a Tax Refund?
5. Borrow Money from Family and Friends
6. Peer-to-Peer Lending
7. Bad Credit Loans
8. Take on a Side Hustle
10. Credit Counseling
11. Cash Advance Apps
12. On-Demand Pay Provider
13. Social Services or Charities
14. Pawn Shop Loans
15. Lending Circles
16. Sell Some of Your Unused Items
The Problems with Title Loans
- They’re expensive: Title loans can lead to a cycle of debt that can cause borrowers to owe more in interest than what the original loan amount was. For example, say you have a $5,000 car title to be repaid in 24 monthly installments with an APR of 108%. Over the course of the loan with monthly compounding, you will end up paying $7362.71 in interest on top of the $5,000 principal. Not to mention any fees or other finance charges that might get tacked on.
- You could end up losing your car: Probably the worst part about entering into a title loan agreement is that you could end up losing your vehicle. A Consumer Finance Protection Bureau study found that, for borrowers who roll over their title loans, one in every five loans ends with the car being repossessed.
- They aren’t much different than payday loans: In both cases, the cost of the loan is high. Both types of loans target borrowers with bad credit and who may not have a lot of financial knowledge. Both have very high interest rates and repayment is difficult, forcing many borrowers to roll them over into new loans. One key difference is that payday loans have a very short term. The due date is usually about two weeks. The other key difference is that if you don’t make loan payments on a payday loan, your account will be passed on to a debt collector. If you don’t repay your title loan, your car will be repossessed. Repossession can leave you in an even worse spot if you can’t get to work to earn money.
What Do I Need To Qualify For An Auto Title Loan?
- Photo ID: The first thing you’ll need is a government-issued photo ID. This includes a driver’s license, state ID, military ID, and passport.
- Proof of residence: You must be able to show you reside in your current state. Credit card statements, an apartment lease, phone bill, utility bill, etc. should work.
- Proof of income: You must demonstrate that you have the ability to pay the loan. Pay stubs, bank account statements, invoices, tax returns, etc., will work.
- A clear title: Because the car title is used as collateral for the title loan, it will have to be in your name. Many title lenders require the car to be lien-free (fully paid off), but a few lenders offer what’s known as a second-lien title loan, which allows you to apply for a title loan even if you don’t have a clear, lien-free title.
- Vehicle inspection: The lender will need to check out your vehicle to assess its value.
Are Title Loans Legal?
Title loans are only legal in some states. These are Alabama, Arizona, Delaware, Georgia, Idaho, Illinois, Texas, Mississippi, Missouri, Nevada, New Mexico, South Dakota, Tennessee, Utah, Virginia, and Wisconsin.
In some states, they are completely illegal. For example, in Michigan, it’s illegal for a lender to take physical possession of the borrower’s original title when a loan is issued.
Title loans are allowed in some other states because of loopholes in their laws. For example, in California, the interest rate on title loans is capped for loans up to $2,500, so lenders typically require a minimum loan amount of more than $2,500. This allows the lender to charge a higher interest rate.
Be sure that you check the laws in your state before you apply for any title loan.
Can I Refinance an Existing Title Loan?
Yes, you can refinance your existing title loan either with the same lender (sometimes called a loan rollover) or with a new lender with potentially more favorable terms. However, be wary of doing so. You’ll probably have to pay another set of finance charges. Predatory lenders could try to trap you in a debt cycle themselves once you refinance with them. Perform your due diligence by reading over any documentation you sign when it comes to refinancing.
The Bottom Line
Title loans are a dangerous type of loan that should be avoided at all costs. Instead, consider the options above if you are in need of cash, or as avenues to help pay off your existing title loan.
In most cases, title loans won’t have an impact on your credit score. This is because lenders typically won’t run a credit check when you apply for one.
Typically no, however, if you are using a title loan for only a small sum, consider other loan options.
If your car is repossessed, this means you defaulted on your title loan. Laws vary state to state but in some states, the lender must give you 20 days after your vehicle was repossessed to pay the amount you owe back in order to get your vehicle back. Keep in mind that lenders can only re-sell your vehicle for a commercially reasonable price.
This depends. If your credit was run during the title loan application process, there’s a chance a repossession will end up on your credit report, thereby damaging your credit score. However, if the repossession is not reported on your credit report, then you can avoid having your credit score decrease.
The primary difference is that with a title pawn loan, the pawn shop takes both the title and the vehicle while you work on repaying the loan. Only after you’ve paid off the loan can you get your vehicle back.