Personal Finance Basics

What is a Title Loan and how does it work?

March 31st, 2023 Mar 31, 2023 • Read time: 7 min


A title loan is a short-term loan that requires your car as collateral to borrow money. Is a title loan right for you? Keep reading, as we’ll take a close look at how title loans work, the pros and cons of a title loan, and other types of loans you can take out instead if a title loan is not the right option for you.

What is a Title Loan?

A title loan is an option that may be useful if you need a short-term cash loan. Title loans, as we mentioned, use your car as collateral. This means, if you (as the borrower) are not able to repay the loan, the lender likely has the right to repossess, or take away, your vehicle. Because of their high-interest rates, title loans may not be for everyone. Plus, some states may not allow title loans–just be sure to check they are legal in your state.

How does a Title Loan work? 

If you are interested in a title loan, search for a lender that offers them. Once you do, you may apply for a title loan–as long as you own your vehicle. You will need to show the lender your car’s title as proof of ownership and you will need to prove there are no liens on the title. A lien is a claim or legal right against your car used as collateral to satisfy a debt owed on it. You will most likely have to do this in person because the lender will need to see your vehicle before agreeing to lend you money.

During the application process, you will need to show the lender your car, your car’s title, and your driver’s license. If the lender approves your application, you will give the lender the title to your car in exchange for the loan. At this point, the lender will also place a lien on the car and you will receive your money. Title loans are usually 30-day loans. Once the 30 days are up, you must make the loan payment, plus interest and fees. And those fees are not cheap–most lenders charge a monthly fee of 25% of the loan amount.

How much can you borrow with a Title Loan?

In most cases, a title loan comes out to anywhere between 25% and 50% of the total value of your car. This is why the lender must examine the car during the application process–it allows them to figure out a fair value of your vehicle. As an example, if a lender determines your car is worth $5,000, your loan amount may be somewhere between $1,250 and $2,500.

When should you get a Title Loan?

A title loan is certainly not for everyone. You should only consider a title loan if you are able to figure out a payment plan to repay the loan when the term, which is usually about 30 days, expires. Otherwise you are going to be stuck with very high interest rates and fees, which can add up to create a large debt. And if you’re not able to repay the loan, your car may be repossessed. If you’re not comfortable with these possibilities, there are other loan options out there, such as personal loans and credit cards.

Pros and cons of Title Loans

As with most loan options, there are good things and not-so-good things about title loans.

Pros of Title Loans

  • No credit check is required. Most title loans do not require a credit check, which makes this a good option for people who might not have perfect credit or be able to qualify for other types of loans.
  • Fast approval process. Because there is no credit check, it usually takes only a few moments for your car title loan application to be approved or denied. All it requires is the lender to review your application and inspect your vehicle to figure out its value.
  • Quick access to cash. And because the approval process is fast, a borrower will get their cash soon after the lender approves–sometimes even the same day.

Cons of Title Loans

  • Interest and fees add up quickly. Car title loans charge very high rates of interest and annual percentage rates (APR). So, even if you only have the debt for a short period of time, you’re going to wind up paying back a lot more than you borrowed. If you take out a title loan, be sure you’re ready to pay back more than you received.
  • Fast repayment periods. Car title loans are short-term loans. This means they often must be repaid within two weeks or up to a month after the borrower receives the loan from the lender. When you compare this to traditional loans, in which borrowers have six months to a few years to repay, you can see just how short a car title loan’s terms are.
  • Potential loss of car. When you agree to the terms of a title loan, you are giving the lender legal permission to take your vehicle if you fall behind on loan payments. If the debt reaches a point where you simply can’t pay it, the lender can then take your car away. This can be avoided, however, by repaying your loan on time.

Title Loan alternatives

If the terms of a car title loan make you a bit nervous, or if you do not own a car that can be used as collateral for a title loan, there are different loan options out there when you need cash quickly.

Credit Cards

There are a couple different ways you can use a credit card to borrow money. If the cash you need is for a large purchase or expenses, one way to use a credit card is to simply charge the purchase or expenses. Even if you are unable to pay off the entire purchase at once, you can still make small monthly payments toward the credit card debt. You will be charged interest on the card’s balance, but the interest rates are much lower than you would pay with a title loan. Many credit cards also allow you to borrow money based on your card’s line of credit. This is often called a cash advance. The amount of cash you borrow is simply added to your credit card balance. Keep in mind that cash advances usually charge higher interest rates and fees than regular credit card purchases.

Payday alternative loans

A payday alternative loan (PAL) allows members of some federal credit unions (you must be a member) to borrow small amounts of money at a lower cost than regular “payday” loans. With a PAL, borrowers can also repay the loan over a longer period of time than a payday loan. And there’s no collateral–such as your car–required.

Personal loans

Another option is to take out a personal loan. A personal loan is money that you borrow from a bank, online lender, or credit union. You then make monthly payments for a certain period of time, plus interest, until the debt has been paid off. There are different types of personal loans, such as secured and unsecured. Secured loans require collateral but may have a lower interest rate, while unsecured loans do not require collateral but may have a higher interest rate. It’s a good idea to speak to a lender to understand which type of personal loan works best for you.

Deciding on a Title Loan

Title loans may be the right option for you if you own your car, need quick cash, and are able to repay the loan quickly. If some of these don’t apply to you, it may be better to look for different types of loans that won’t add even more debt through high fees and interest rates like a title loan could. If you do opt for a title loan, just be sure you have your car’s title and any other necessary paperwork to give to the lender. If you decide against a title loan, there are options out there.

Sun Loan can help you borrow the money you need, even if your credit isn’t perfect. Our personal installment loans are often the right fit for borrowers, no matter their credit history. Because at Sun Loan, customers are not just a credit score as they are for many other banks. We look beyond just credit score to better understand your financial history. Maybe you’re new to borrowing and credit, or perhaps your credit score took a hit because of a bad investment experience. At Sun Loan, you can still qualify for a personal installment loan even if your credit score isn’t the best. Our personal installment loans allow you to quickly borrow money and pay it off affordably each month, which can build your credit score.

Apply for a personal installment loan online. Or stop by one of our local branches or give us a call at (800) SUN-LOAN to speak to an experienced, friendly loan professional about your loan options.

Author – Holly Munoz

Holly Munoz serves as Regional Vice President at Brundage Management, the management holding company that operates Sun Loan and related subsidiaries. Holly has over 15 years of experience in the loan ... Read more »

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