Title Loan Basics: Everything You Need to Know

Title loans can seem like a beneficial form of financing, but are they right for you? 

Everybody has been in a situation at some point where they are in a pinch and need quick access to cash. Whether that be medical expenses, necessary car repair costs, home repairs, or something else entirely, getting funds quick can be a challenge. Title loans are a type of financing that allow a borrower to get cash fast. 

While this can sound enticing on the surface, there are aspects to a title loan that must be understood before taking the steps to fill out an application.

What is a Title Loan

A title loan is another term for a secured short-term loan, typically with a higher interest rate, that is used to cover quick or emergency expenses. This loan type uses the title of your vehicle as collateral for the amount of the loan, and is usually a loan option used by people with lower credit scores or a limited credit history.

For perspective, a direct lender for bad credit may offer a number of financing alternatives besides the traditional loans that a person with poor credit may not qualify for. This can allow those with a weaker credit history access to funds for emergency expenses, but this financing type can come at greater risk to the borrower. 

Secured vs. Unsecured Loans

There are two main types of loans lenders will offer: secured or unsecured. An unsecured loan is one that does not require any form of collateral on behalf of the borrower. This simply means that if a borrower stops making repayments on the loan, the lender has no collateral that can be used to cover the outstanding debt. Most personal loans, or credit cards, are common forms of unsecured debt. 

On the other hand, secured debt refers to a loan that has collateral involved. If a borrower stops making payments on the debt, the lender potentially has a legal right to take ownership of the collateral. Vehicle loans and home mortgages are two of the most common examples, with the car and home serving as collateral respectively. 

Unsecured debt is typically reserved for prospective borrowers with better credit, as there is more risk for the lender, whereas secured debt is reserved for those with lower credit scores. 

How Does a Title Loan Work?

The loan application process for a title loan works in exactly the same way as any other type of loan. However, an applicant for a title loan must own their vehicle completely and have a lien-free car title associated with it. Due to this, you will be required to show proof of these items during the application process for a title loan.

Here’s how a title loan would work:

1. A potential borrower submits an application for a title loan along with proof of ownership of their vehicle
2. A lender reviews your application and makes an approval decision
3. If approved, you hand over your car title and the lender hands over the requested amount of money to be borrowed
4. At the end of the loan, you will make a lump sum payment, including any interest or fees, to pay back the debt and your title will be returned

Be aware that the process sounds simple on the surface, but becomes more complicated when real dollars enter the picture. You may only request a couple thousand dollars, but the average monthly financing fee is 25%, which translates to an average APR of around 300%. This is where the risk of using your vehicle as collateral comes in, as being unable to pay back the loan means you lose your car. 

Pros and Cons of a Title Loan

All forms of debt have their specific pros and cons, with title loans not being an exception. Here are some of the key points to consider when determining whether or not a title loan is right for you:

Pros of Title Loans

• Quick access to much needed funds
• Little information required for the application process
• Smaller sums of money available for borrowing, with the average amount being 25-50% of your vehicle value

Cons of Title Loans

• The risk of needing to take out a loan just to pay a title loan back
• Far higher interest rates and overall APR
• Decreased repayment terms
• The risk of potentially losing your vehicle 

The decision of whether or not to take out a title loan should not be made lightly considering the risk. This type of loan should only be considered if you are 100% certain you can make the lump sum payment, including all fees and interest, on time and in full. 

How Do You Get a Car Title Loan?

Assuming you are leaning towards taking out a title loan, there are a few pieces of information you will need for the application process:

1. Your name, address, and other personal information will be required
2. Potentially a credit check or proof of income, but these are lender-to-lender items
3. Proof of ownership for your vehicle and a lien-free title

The above items are typically all that is required for a title loan application, which is partially what makes it such an enticing form of financing. However, remember that a simple application doesn’t equate to less risk. 

Alternatives to Car Title Loans

In the event you determine that a car title loan isn’t right for you and you are curious as to other options to consider, here are some of the most common alternatives to car title loans: 

• Take on an extra job: While taking on a second job isn’t always ideal, it’s a debt-free way to get access to extra cash. This method is best when cash is needed in the near future, but not necessarily right now. 
• Reach out to friends and family: If the emergency expense you need money for is relatively small, consider discussing with your friends and family about whether or not they would be willing to help out. 
• Short-term traditional loan: Don’t avoid applying to a standard loan simply because of a low credit score. Due to the favorable interest rates offered, consider submitting for a small loan with a bank.
• Use a credit card: Assuming your credit limit permits, putting a couple thousand on a credit card will provide you with longer repayment and a lower APR than a title loan. Just be sure to pay off the credit card debt as soon as possible.

Find financing that suits your needs

Financing is available to those with lower credit scores and title loans are one potential option to consider. Assuming you can meet the repayment of the title loan in one lump sum with all interest, this can be an excellent way to get quick access to cash. If you aren’t sure about your ability to repay the loan, consider alternative options to avoid falling into a cycle of debt.