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Title loans are one way to get cash in an emergency, but they have numerous drawbacks and should generally only be considered as a last resort. Although car title loans can provide fast access to money, the high costs and possibility of losing your vehicle make them a risky way to borrow, even if you have poor credit.
What Is a Car Title Loan?
A car title loan is a short-term loan that uses your car's title as collateral. If you own your car outright or have significant equity in it, you can hand over the title to your vehicle to the lender in exchange for quick cash. The lender holds on to the title until you repay the loan.
Most title loans don't require a credit check, which makes them accessible even if you have bad credit. You can typically borrow 25% to 50% of your car's value and often receive funds the same day. However, if you don't repay the loan, the lender can take possession of your car.
Title loans are often used by people who find themselves in emergency situations, such as covering unexpected expenses or bridging a gap between paychecks.
Learn more: How to Get a Loan With Bad Credit
Drawbacks of a Car Title Loan
Getting a car title loan might seem like a quick solution to a cash shortage, but there are several downsides to consider before you apply for one.
Extremely High Interest Rates
Car title loans often charge interest rates of 25% per month, which translates to an annual percentage rate (APR) of roughly 300%. For comparison, APRs for personal loans often max out at about 36%. There may also be finance charges and fees for a title loan.
Short Repayment Terms
Many title loans have extremely short repayment terms, such as 15 to 30 days. This doesn't give you much time to pay off your loan. Borrowers who are already short on cash can have a difficult time coming up with additional funds to make timely payments.
Risk of Repossession
If you don't pay back your title loan, the lender can repossess your car. This can create a domino effect: Losing your car makes it difficult to get to work, which can cause you to lose pay or even lose your job. This series of events would certainly worsen the financial problems the car title loan was meant to solve. Some 20% of borrowers who take out car title loans ultimately have their vehicles repossessed, according to a report from the Consumer Financial Protection Bureau (CFPB).
On top of the impact to your bank account, defaulting on the loan will damage your credit, which could make it harder to qualify for credit in the future.
Limited Availability
Depending on where you live and other factors, a car title loan may not actually be an option for you. Some states prohibit title loans or heavily regulate them, so whether they're available to you depends on your location. You must also own your car outright or have significant equity to qualify for a title loan. If there is a lien on your vehicle, you typically aren't eligible.
Danger of a Debt Cycle
If you can't repay your car title loan on time, you can typically roll it over into a new loan. However, this means more interest and additional fees. As your loan amount snowballs, you may end up trapped in a cycle of debt that's hard to get out of. More than two-thirds of people who get title loans ultimately roll their loans over six times or more, a report from the CFPB found.
Learn more: What Is a Debt Cycle?
Alternatives to a Car Title Loan
While car title loans may seem like a quick solution to a financial crisis, there are other options that are generally safer and more affordable.
Personal Loans
An unsecured personal loan can give you access to funds with lower interest rates and longer repayment terms than a car title loan, and without putting your vehicle at risk. People often opt for car title loans if low credit scores leave them with few borrowing options. However, it is possible to find personal loans for poor credit.
You can also apply for a personal loan with a cosigner who has a better credit score. Just keep in mind that if you don't make your payments, the cosigner's credit score will suffer as well unless they step in and start making payments.
Learn more: What Is a Personal Loan?
Secured Loans
Like car title loans, secured loans use your vehicle as collateral, but have more favorable terms. Sometimes advertised as auto equity loans, secured loans are often available from credit unions and online lenders. Interest rates typically max out around 36%, and loan terms usually range from two to five years, giving you more time to repay your loan.
Because secured loans require collateral, they may be easier to get than unsecured loans if you have poor credit. You may also be eligible for a higher borrowing limit or lower interest rate than with an unsecured loan.
Be aware: Before using your car as collateral for a secured loan, be sure you can repay the loan. Otherwise, you could lose your vehicle, the same as with a title loan.
Learn more: Title Loan vs. Secured Loan
Payday Alternative Loans
Another option to consider is a payday alternative loan (PAL). These differ from more expensive payday loans and are available from many federal credit unions. PALs usually allow borrowers to access anywhere from $200 to $1,000, with APRs capped at 28%. You must be a member of a credit union for at least a month prior to applying for the loan, so a PAL may not work for you if you need cash right away. However, if you belong to a credit union that offers them, PALs can be a more affordable solution than a car title loan.
Paycheck Advance Apps
Also called early payday apps, paycheck advance apps let you access emergency cash quickly, often with no credit check. Unlike costly payday loans, these aren't actually loans. Instead, they are an advance on your future wages, and have low or no fees and interest. Paycheck advance apps may be available as standalone apps, offered by your employer or through online banks or programs.
Credit Card Cash Advances
A credit card cash advance is another way to get quick cash without collateral. Credit card cash advances typically charge a standard fee of 5% of the advanced amount or $10 (whichever is higher). Cash advance interest rates are higher than those for purchases—as high as 36%—and interest begins accruing immediately.
Cash advances do not appear on your credit report, but they can affect your credit indirectly. The cash advance is added to your credit card balance, which might affect your credit score if it pushes your credit utilization rate too high.
Borrowing From Friends and Family
Family and friends may be another alternative if you need money in a hurry. Make sure you only borrow from someone who can spare the money. Draw up a contract with a repayment plan, possibly including interest. Then repay the loan as agreed to avoid damaging your relationship.
Financial Assistance
Nonprofit, government or community organizations in your area may be able to help you cover essential expenses, such as rent, utilities and groceries. Call 211 to connect with someone who may be able to get you the assistance you need.
Learn more: Ways to Pay for Unexpected Expenses
Frequently Asked Questions
How Do Title Loans Work?
Title loans let you borrow money fast using your vehicle as collateral. Depending on the lender, you may be able to borrow $100 to $10,000 or more, typically 25% to 50% of the car's value. The lender holds your car title until you repay the loan, which you generally must do within 15 to 30 days. If you don't pay the loan, the lender can repossess your vehicle.
What Do You Need for a Title Loan?
Requirements for a title loan tend to be minimal. You'll typically need:
- Clear title to the vehicle
- Photo ID
- Proof of insurance
- Proof of income or other evidence of ability to repay the loan
- Your vehicle for inspection or uploaded photos of the vehicle showing its condition
You generally won't need to undergo a credit check.
Do Title Loans Hurt Your Credit?
Title loans usually don't affect your credit score. Most lenders don't conduct a credit check when you apply for a title loan. In addition, title loan payments generally aren't reported to credit bureaus, so they won't help or hurt your credit. However, there are still major financial consequences if you don't repay the loan, including having your car repossessed.
The Bottom Line
Title loans can provide fast cash, but they can be expensive and pose serious risks—including potentially losing your vehicle. Before applying for a car title loan, take time to explore other options that are safer and more affordable, such as a personal loan. Experian's loan comparison tool shows you personal loans matched to your credit profile, so you can compare rates with no impact to your credit.
Once your cash crunch is in the rearview mirror, make a plan to build an emergency fund you can rely on for future unexpected expenses to help avoid borrowing money.