What is a Title Loan?

A car title loan is a short-term borrowing method that uses your vehicle as collateral. These types of secured loans have few requirements — typically lenders do not evaluate monthly expenses or debts and there's no credit check. Borrowers have to show the title lender the legal title, proof of insurance, photo id and the vehicle itself.

Title loan terms usually last just 15 or 30 days, and the amounts loaned tend to be about 25% to 50% of the value of your vehicle, the Federal Trade Commission notes.

How Do Title Loans Work?

In exchange for the title loan, the lender takes your vehicle title as a guarantee of repayment. When the loan and associated fees are repaid, the title is returned. If the loan isn’t repaid when the term ends, one of two things may happen — the lender allows the existing loan to be rolled into a new loan, or the car is repossessed and resold by the lender to make up for the money lost.

Title loans usually have an average monthly finance fee of 25% of the amount being borrowed, which translates to an annual percentage rate (APR) of about 300% — a rate that’s much higher than most other types of loans.

Here’s how it works: Say you need to borrow $1,000 for 30 days because of an emergency bill. A title loan lender’s finance fee is 25% of that $1,000, or $250. At month’s end, you’d owe the lender $1,250 for your $1,000 loan.

What are the Pros and Cons of Title Loans?

Title loans can be a source of emergency cash without qualifications or approvals. And they’re generally available quickly to anyone who has a clear title to a car — or has at least paid off a significant amount of a vehicle loan. Car title loans may offer higher borrowing amounts than typical payday loans.

However, there are significant disadvantages to be aware of when it comes to title loans for cars. First is the cost. While the average fee is 25% of the principal for 30 days, there is a huge amount of variation in the costs of title loans. As with any loan, you need to review your loan offer carefully. The second major disadvantage of a title loan is that your car secures the loan. That means the lender can repossess it if you are unable to repay the loan.

Are Title Loans Risky?

With a car title loan, you won’t get your vehicle title back until the amount you borrowed, plus the finance charge and other fees, are repaid. If you can’t repay the loan when it’s due, just like with a payday loan, you may be able to buy more time by rolling it over into a new loan for another 30 days. These rollovers will add more interest and fees to the amount you owe — increasing your cost of borrowing.

Take our previous example of a $1,000 title loan with a 25% finance fee. Say you’re unable to pay back the loan in full after 30 days. So, you roll over the loan to the next month and get charged an additional $250. In just two months, your total cost is now up to $500 — or half of the total loan amount you borrowed in the first place.

In addition, if the new loan amount can’t be repaid, the situation can end with the repossession of your car. Once that happens, the lender can sell the vehicle and keep the money. That not only makes your financial situation worse but leaves you with no transportation — potentially putting your livelihood at risk as well.

What are Some Title Loan Alternatives?

Fortunately, car title loans aren’t the only way to obtain cash fast. You may have other financial options available that won’t levy such sky-high rates or put your car at risk. Here are several alternatives to check out:

Borrow from family and friends. It can be hard to ask to borrow money from family or friends, but those who are close to you may be willing to help in a pinch if they’re able. With the right approach, details and agreement in place, getting a loan from someone you know and trust can be a much more affordable, flexible and private alternative to title loans.

Small-dollar loans from your credit union or bank. Your financial institution may offer small-dollar loans or payday alternative loans with much better rates than title lending companies. They are designed for checking account customers with short-term money needs of about $200 to $1,000. These loans require no collateral, have longer payback terms and have an overall lower cost.

Credit unions and banks might even have a title loan-like product, but they call it by a different name. Before you go to the title loan agency, call your credit union or bank and ask about a cash-out auto refinance instead of calling it a title loan.

Cash-out auto refinance loan. Some banks and credit unions may also offer the option to take out a standard auto loan when you have a clear title to your car. They treat these loans just like a loan when you purchase a vehicle. You may choose to try a local credit union first. Even if you aren’t a member, most credit unions allow you to apply for membership and a loan at the same time. If approved, the amount of money you’ll receive will be based on the vehicle’s worth and age.

Personal unsecured loan. This more traditional lending route from your local bank or online lender means no collateral (such as your car) is required. If approved, you receive an entire sum up front to use as you choose. That money must then be repaid with interest in regular installments. A personal loan could provide funds within a few days at potentially much more favorable rates than title loans, depending on what you qualify for.

Credit card cash advance. If you have a credit card with an available balance, taking a cash advance is also a way to borrow money with a lower APR than a car title loan. A cash advance is like a short-term loan against your available credit line. But keep in mind that interest rates are considerably higher (often hovering around 25%) than the regular interest rates charged for purchases, and come with a cash advance fee, so you’ll want to be able to pay back the loan promptly.

Give Short-Term Lending Careful Consideration

When you’re strapped for cash, the promise of quick money with no hassle offered by an auto title loan can seem like an attractive option. But before resorting to a loan agreement, always consider less expensive and less risky alternatives first.