How Do Title Loans Work?

Being strapped for cash is not the best feeling in the world. If you’ve ever seen those cheesy commercials on TV advertising title loans, you might be wondering what a title loan is and how does a title loan work? We will explain what they are and how they work in much detail below.

How Do Title Loans Work?

Title loans, commonly known as car title loans work in that a car owner who needs cash deposits his car title and keys with a lender in exchange for a short term loan. If the borrower pays back the money he owes the lender, the title to his car is returned to him, but if he fails to pay back the loan, the lender will repossess the vehicle and sell it to recoup the amount you borrowed from them.

Although you may be tempted to borrow money using a title loan, you should avoid them at all costs. Title loans are extremely expensive and failing to pay them off in time could cost you your vehicle.

Title loans are attractive to people with bad credit because car title loan lenders often do not check a borrower’s credit since the loan is secured by the title of their car or motorcycle. The more valuable your car, the more you will be able to borrow.

Due to how aggressive title loan lenders are, many states such as California, Arizona, Florida, Illinois, and many more have outlawed the practice.

How Can You Get a Car Title Loan?

Although we advise against getting a car title loan, you can get a car title loan by applying online or visiting a title loan store and filling out the application in person. When you fill out the application, you will typically be asked to provide basic information, such as your name, date of birth, employment status, income, and vehicle information.

If approved, you will be able to get a loan up to 50% of the value of your car. For example, if your car is worth $10,000, you may be able to get a loan up to $5,000 without having to undergo a credit check.

Most title loan lenders will only lend you money if you have the title of your vehicle. If you’re approved, you will need to deposit the title with the title loan lender, as well as an extra set of keys to the car.

Once you’ve deposited your keys and car title with the car title lender, you will be given the amount you’re seeking to borrow.

If you pay off the car title loan, your vehicle’s title and keys will be returned to you. That said, you can continue to drive your car normally while you pay off the loan.

If you do not pay off the loan, the lender will proceed to repossessing your vehicle and selling it to recover the amount of money that you failed to pay back.

If your vehicle is repossessed, some states require that the car title loan lender use the proceeds of the sale of your vehicle to pay themselves back and return the remaining amount to you. That said, some states do not have this requirement and allow the car title loan lender to keep the entire amount.

How Much Do Title Loans Cost?

Although title loans may seem like a great option for those who have bad credit and want to borrow money, title loans are very expensive, so you should be cautious before applying for one. Title loans usually charge an interest rate of 25% per month. So, if you were to borrow $1,000 for 30 days, you would need to pay $250 in interest just to borrow $1000 for 30 days.

In addition to interest, title loan lenders will charge you a finance charge, as well as a title certification fee. Finance charges usually amount to $150 and title certification costs approximately $30. So, to borrow $1,000 for 30 days, you’re looking at approximately $430, which makes title loans extremely expensive. You should approach using title loans with extreme caution. This is so because if you fail to pay back the money that you borrowed, you will lose your car, which for some is one of their most valuable possessions.

Do Title Loans Hurt Your Credit?

No, a title loan is unlikely to hurt your credit because title loans are not reported to the credit reporting bureaus, as such, they have no impact on your credit score. Even applying for a title loan is unlikely to hurt your credit because credit checks are not required to qualify for a title loan. This is so because title loans are secured with the title to your vehicle. If you default, a title loan lender will repossess your car to recoup the unpaid debt you owe to them.

In the event that your title loan lender checks your credit before lending you money, a hard inquiry will only lower your credit score by 5 to 10 points. That said, your payment history is not reported to the credit reporting. So, whether you make payments or miss them, they will not affect your credit score.

Defaulting on a title loan is unlikely going to affect your credit. This is so because if you default on the loan, the title loan lender will repossess your vehicle to recoup the outstanding amount that you owe them, so it’s not necessary for a title loan lender to sell the debt to a collection agency, which can cause damage to your credit by adding a collection account to your credit report.

Alternatives to Using Title Loans

If you need access to cash, here are some alternatives to using car title loans:

Personal Loan – If you have good credit, you’re better off applying for a personal loan because personal loans are less expensive since they have lower interest rates and fees associated with them. If you have bad credit, you may qualify for a personal loan with lenders that cater to people with bad credit. That said, be ready to pay more in interest than someone with a good credit score.

Cash Advance – If you have a credit card that allows you to take out cash, you are better off using it to get quick cash than you are by using a title loan. That said, using a credit card for a cash advance is expensive but is still cheaper than using a title loan. That said, if you default on making payments on your credit card, you will not lose your car because credit cards are a form of unsecured debt.

Family & Friends – If you need quick cash and you have a close family member or friend, you may want to ask them to lend you the money. This way, you can avoid paying interest all together. This is a significantly better way to borrow money than using a title loan where there is a big chance that you will lose your vehicle if you do not make timely payments on the loan.

Are Car Title Loans Worth It?

If you need cash quickly and you’ve exhausted all other options, a car title loan will be worth it if you need quick cash and are willing to risk your vehicle. Title loans are extremely expensive, often costing more than 40% of the amount you intend to borrow. For example, if you need to borrow $1,000, you could be looking at approximately $400 in fees, making you responsible for repaying $1,400 to borrow $1,000 for 30 days. So, if you value your vehicle, you should approach them with extreme caution.

Do Title Loans Appear On Your Credit Report?

No, most title loans will not appear on your credit reporting because they’re usually not reported to the credit reporting bureaus. As such, whether you make payments or fail to make them, your credit will not be affected. However, if you default on a title loan, you could lose your vehicle.

What Happens If You Do Not Pay Back a Title Loan?

If you do not pay back a title loan, the title loan lender will repossess your vehicle and sell it to recoup the amount you borrow but failed to pay back.

Is It Hard to Get a Title Loan?

If you have the title to your vehicle, you will likely be able to qualify for a loan that’s worth 25% to 50% of the cost of your vehicle. That said, you should keep in mind that if you default on a title loan, your car will be repossessed and sold to satisfy the debt that you owe the lender.

How Much Money Can You Get From a Title Loan?

You will usually be able to get 25% to 50% of the value of your car by obtaining a car title loan.

Bottom Line

Title loans, commonly known as car title loans, allow a person to borrow money by depositing the title to their vehicle and a set of keys with a title loan lender in exchange for a short term loan. If the borrower pays back the money he has borrowed, his title and keys will be returned to him. However, if the person fails to pay back the money, the lender will repossess the borrower’s vehicle and sell it to satisfy the unpaid debt. If you have any general questions or comments, please feel free to leave them in the comments section below.