How Do Auto Title Loans Work?

If you’re in a financial bind and need fast cash, you may be considering a title loan. This type of loan has a simple application process and you can generally receive a much higher amount than what you’d qualify for with a payday lender. Even better, it’s easy to apply and credit issues won’t prevent you from qualifying.

To qualify for a title loan, you must have a vehicle registered in your name and have access to the title. The title also has to be free of any liens.

Once you have the title in hand, you can visit a local or online lender to inquire about a loan. The amount you qualify for is usually based on the value of the vehicle and your income. For the latter, the lender will use your income to determine how much you can afford to pay each month.

How Do You Get An Auto Title Loan?

You’ll need to submit an application to determine if you qualify. Upon approval, you’ll have cash in hand or access to cash within 24 hours deposited into your bank account. Click here for our list of recommended companies to work with.

What Documents Do You Need for a Title Loan?

To complete the application, you’ll want to have the following documents handy:

  • The title of your vehicle. You can’t get a title loan without the title. Why so? The title serves as collateral and gives the lender rights to your vehicle if you default on the loan. As mentioned earlier, the title should also be free of liens.
  • Photo identification, including a state-issued driver’s license, identification card or passport.
  • Proof of income. A W-2 or copies of your most recent pay stub should work. If you’re currently unemployed, the lender may request bank statements. And if you’re self-employed, the lender may also need financial reports or a copy of your last tax return.

How Much Do You Get for a Car Title Loan?

Once you’ve submitted the loan application, the next step is the appraisal. The lender will have this done to determine what your vehicle is worth. Finally, they’ll analyze the financial information to create a customized loan offer.

Title loans range from $100 to $5,500 on average, notes the Federal Trade Commission. But some lenders will loan you as much as $50,000. But, most consumers are only permitted to borrow 30 to 50 percent of their vehicle’s value, according to AARP.

Can You Get a Car Title Loan With Bad Credit

Even if your credit is in the trenches, you can qualify for a title loan. In fact, these loans cater to consumers with less than perfect credit. And lenders don’t check your credit during the application process. Instead, they’re more concerned with you having a lien-free title as this is what they use to secure your loan. And in the event you default on the loan, the lender will repossess the vehicle and sell it off to recoup their loss.

How Is Interest Calculated on a Title Loan?

As with any loan product, you can expect to pay interest on title loans. But since these types of loans pose a greater risk to the lender, the rates are quite steep. According to the Federal Trade Commission (FTC), you should expect to pay a triple-digit annual percentage rate (APR). “Lenders often charge an average of 25 percent per month to finance the loan. That translates to an APR of at least 300 percent or higher, FTC.gov adds.

Do Title Loans Go On Your Credit Report?

Lenders do not conduct credit checks, so a credit inquiry will not go on your credit report when you apply. (If you didn’t know, new credit account for 10 percent of your credit score, and each new inquiry can take up to five points off your credit score, notes myFICO).

While you’re repaying the loan, the lender won’t report the loan nor payment activity to the credit bureaus.

But if you default on the loan, the lender can repossess your car and this is where credit reporting comes in. A repossession is very damaging to your credit score. Even worse, it will linger on your credit report for a whopping seven years. Read more on how title loans can affect your credit here.

Can You Take Out a Title Loan On a Financed Car?

If you’re still making payments on your car, you won’t have access to a lien-free title. That’s where auto equity loans come in. To qualify, you’ll need a steady source of income and a vehicle that’s registered to you.

Most lenders will also require that you be current on your auto loan payment and have made the last six consecutive monthly payments on time.

There isn’t a minimum credit score, but be prepared to pay a high-interest rate. This can be up to 36 percent as mandated by federal law. You should also know that the loan amount will be lower since it’s determined by the equity in your vehicle.

Can You Sell a Car If It Has a Title Loan On It?

It is possible to sell your car if it has a loan attached to it. But, you’ll need to settle the outstanding balance in full before the transaction is complete. That way, the buyer will receive a lien-free title.

Where to Find Title Loans

There are scores of online and brick and mortar lenders that specialize in auto title loans. You can also check with your local bank or credit union. But keep in mind that their qualification criteria will be more stringent. And they will check your credit when evaluating your loan application.

Can You Get a Title Loan Without a Job

You don’t have to have a job to qualify for a title loan. But, you will need to provide proof of an alternative form of income, like retirement, disability or unemployment income. This will prove to the lender that you have the ability to make payments. More on title loans without a job here.

And in some rare instances, you may be able to find online lenders that offer no job or income title loans.

Can You Pay Off a Title Loan Early?

Most title loans have a 15 or 30-day repayment period. (If the loan is for a larger amount, it will more than likely be in the form of an installment loan with a 6-month repayment period). But if you can’t repay the loan within that timeframe, the lender may offer a rollover option for an extra fee plus interest. On the other hand, you may be able to pay off the title loan early without incurring a prepayment penalty.

Dangers of Title Loans

Before applying for a title loan, there are some major risks you should be mindful of, which include:

  • Risk of Repossession. Approximately 1 in 5 auto title loan recipients will have their car repossessed due to the inability to keep up with the payments, notes the Consumer Financial Protection Bureau. This makes the problem even worse than what you started with.
  • Exorbitant Interest and Fees. The sky-high interest rates hike up the payments on title loans. This makes it even more difficult to cover day-to-day expenses and pay off the loan on time. This is especially the case if you’re forced to rollover the balance.

Alternatives to Title Loans

If title loans are not available in your state, there are other viable options to consider, like loans from friends and relatives. You may also be able to sell or pawn possessions or make payment arrangements with service providers and creditors to free up funds.     

Also, conduct research to find lenders that specialize in personal loans for bad credit. They may be accompanied by higher interest rates, but most are unsecured and your car won’t be at risk of repossession.

The Bottom Line

Because title loans aren’t without risks, you should carefully evaluate your options to determine which loan product best suits your needs. Also, explore other viable alternatives as there may a more optimal way to get the cash you need if you’re in a bind.