A car title loan is a quick way to obtain cash when you need it. In a title loan transaction, you offer up your car as collateral and receive a short-term infusion of cash from a lender. No credit check is required. Typically, you only need to show an ID and proof of insurance.
Car title loans might be attractive if you’re hit with unexpected bills and don’t have the savings to cover them. You might not have great credit as well, so obtaining a loan from a bank or credit union could be difficult.
The collateral you offer to secure the title loan can be your car, motorcycle, or another vehicle. You typically own the vehicle outright. Car title loans are not usually offered on cars that are financed. However, if you’ve paid off most of your car loan, a lender might be willing to offer you a title loan.
Car title loans are short-term loans, typically with a term of 30 days or less. The loan amount is usually between 25% and 50% of the car’s value. The lender takes hold of your car’s title and can repossess your car if you don’t repay the loan on time.
Some lenders have been known to place GPS devices on vehicles! If the borrower fails to repay the title loan, the lender can then easily find the vehicle and repossess it. Some lenders have installed starter interrupts that allow them to remotely prevent a vehicle from starting. And many lenders have asked borrowers for a second set of keys.
These tactics by lenders reveal their mindset when offering car title loans. They clearly think there’s a good chance the borrower will be unable to repay the loan on time and the vehicle will need to be seized.
In fact, a 2016 study by the Consumer Financial Protection Bureau (CFPB) found that 1 in every 5 vehicles secured by a title loan was repossessed because the borrower couldn’t repay the loan.
Fees, fees, fees
Car title loans sound straightforward enough. You hand over your car’s title for a short-term infusion of cash. But they can be shockingly expensive.
Lenders, on average, charge interest of 25% on a 30-day loan. In addition to interest on the loan, lenders often tack on other fees. They may charge fees for originating the loan and for processing it. They may also require that you purchase add-ons, such as roadside assistance or special insurance on the vehicle. These fees are tacked on to the amount you’re borrowing and can add up fast.
Lenders often emphasize the benefit of being able to quickly obtain cash from a title loan, while downplaying the high interest rates and added fees that are involved. They naturally profit from the high fees. They heavily promote car title loans because of them.
Lenders also often gloss over the worst-case scenario in which your car is seized if you fail to repay the loan on time.
Beware the rollover
Perhaps the most egregious aspect of a car title loan is its tendency to roll over month after month.
Since car title loans are short-term, borrowers need to gather the funds to repay them pretty quickly. If they’re not able to, lenders will offer to roll the loans over for another term. With the rollover comes more interest rates and fees. There might even be a special rollover fee.
So a $1,000 loan for 30 days at 25% interest would have cost the borrower $1,250 at the end of the month. Imagine they can’t make that payment and roll the loan over for another month. The $1,000 loan will now cost them $1,500 at the end of month two. Remember, the interest rate of 25% is a monthly rate, so it’s reapplied to the loan every month the loan is rolled over. At the end of month two, the interest on the loan is equal to half of the amount borrowed!
This vicious cycle can continue for months on end, often drowning the borrower in debt they can’t possibly repay. At the end of a year, that $1,000 loan will have ballooned to a $4,000 payment.
Car title lenders actually rely on the fact that many borrowers won’t be able to repay their loans on time. The majority of the income for a car title lender comes from borrowers who roll over their loans at least six times!
In June 2019, the CFPB found that 83% of borrowers who took out an auto title loan in the previous six months still owed money on the loan.
Beware of the early repayment penalty too
If you’ve taken out a car title loan for longer than 30 days, your contract might include an early repayment penalty. If the term of the loan is, say, three months and you want to pay it off in two, you’ll be hit with an early repayment penalty (also known as a prepayment penalty). Lenders don’t want you paying off your loan early because that would deny them the high fees they can collect on loans that run for long periods of time.
Disclosures lenders must make
Even though a car title loan is a short-term loan, lenders are required by law to disclose the percentage rate on the loan as an annual percentage rate (APR) and as a dollar amount. Some lenders avoid making these disclosures, however.
The APR is what the loan would cost over a one-year period. Paying 25% on a 30-day loan might not sound exorbitant, but the APR on that loan would be 300% (25% x 12).
It’s important to look carefully at the paperwork for any extra fees as well, such as late check fees or rollover fees.
In an ideal world, lenders would be required to disclose the kinds of scenarios that can play out when these short-term, high-cost loans are taken out and borrowers can’t repay them on time.
Laws governing car title loans vary by state. Car title loans are not available in all 50 states. State laws determine if they’re permitted, and only about half of the states allow them. Many states banned them because they found them to be predatory.
Special protections for military members
The Military Lending Act limits the APR on car title loans to 36% for members of the military. The law also requires lenders to disclose certain things to military borrowers, such as their rights and the cost of the loan.
The military also offers financial assistance to members who need it. Numerous government agencies (Department of Defense, CFPB, and Federal Trade Commission, among others) jointly created Militaryconsumer.gov. The website is a “first line of defense” against financial fraud and aims to help military members make better-informed financial decisions.
The Department of Defense’s Military OneSource program can also help with financial and tax questions. Military OneSource’s website is here and there’s a helpline at 800-342-9647.
If you’re a victim of fraud
If you think a lender has defrauded you, contact the consumer protection agency in your state. You can find your state agency by searching for it here.
You can also report the fraud to the Federal Trade Commission here. The FTC doesn’t resolve disputes, but law enforcement refers to its database and will bring charges if they notice patterns of abuse.