Strapped for cash? Even financially stable families may sometimes find themselves in a situation where they need cash fast. Unforeseen events can strip a person’s savings or continued financial difficulties may cause a family to look for any means of finding a short-term loan.

You’ve probably heard of payday loans – the loan that has caught the attention of federal and state lawmakers in recent years (see Beware of Payday Loans) – but that’s not your only option.

Car title loans are similar to payday loans except that you have to pledge your car as collateral. It’s not just a pledge on paper. You actually give the lender your car title. Some may even ask for a second set of keys. If you don’t pay, the lender will take your car and sell it to pay back the loan.

How a Car Title Loan Works

You can get a car title loan either online or from a local lender. Complete the application, supply the required documentation – including a car title without any liens against it – sign the paperwork and the loan is yours. In most cases the lender won’t perform a credit check.

While it may be easy to get a car title loan, think hard before you ask for one: For starters, look at the interest rate. Some states limit the interest rate of car title loans to 30% per year, but others may allow lenders to charge rates of 25% or more per month. This equates to an APR, the interest rate expressed in an annual rate, of more than 300%. Along with interest charges, the lender may tack on additional fees. According to the Center for Responsible Lending, loan rates are often 20 to 30 times higher than credit card rates.

Car title loans are short-term – often 30 days. If you can’t repay the loan, it will probably be rolled over. The average car title loan will be rolled over eight times. If you hold the car title loan for one year at a 300% APR, you will pay about $1,111 on a $500 loan not accounting for fees.

Not All States Allow Car Title Lending

Fewer than 30 states allow car title lending, but 16 allow for lending at triple-digit APRs. Some lenders make loans in certain states due to loopholes in the law while others change the terms of the loan to fit state law. Before looking for a title loan, either online or at a physical location, learn the laws of your state. Look at this graphic to see if your state allows car title loans.

Before You Take Out a Car Title Loan

First, exhaust every other possible source of short-term cash. You are risking your car – for high interest rates and fees – to get a loan worth far less than your car. One study showed that 60% of New Mexico car-title borrowers had their car repossessed as a result in the year the data were gathered.

Second, read everything in detail. Know the interest rate, the fees, repayment and rollover policies, and the laws in your state governing car title loans

Finally, don’t borrow more than you’re sure you can pay back in 30 days. Don’t allow the loan to roll over.

The Bottom Line

Before getting a car title loan, consider any other way of raising money first. Consumer.gov advises checking with your bank or credit union for a short-term loan, negotiating with your creditors, borrowing from family members, or using money saved for other purposes.

The terms of car title loans are such that you should consider one a last resort.

Related Articles
  1. Retirement

    The Best And Worst Ways To Raise Cash Quickly

    When the need for emergency cash arises, it is crucial to watch costs carefully.
  2. Options & Futures

    10 (Costly) Tickets To Fast Cash

    Circumstances arise when you need cash fast. Unfortunately, each option has its own risks and sometimes, a very high cost.
  3. Personal Finance

    In A Cash Crunch? Hold A Yard Sale

    Lighten your load for a heavier wallet. We'll provide helpful tips to ensure a successful sale.
  4. Options & Futures

    Car Title Loans: Good Option For Fast Cash?

    These loans provide fast cash, but they could leave you deeper in debt - and without a car.
  5. Credit & Loans

    Millennials Guide: Buying Your First House

    Millennial homebuyers need to research a lot of things, such as how much to pay, down payments, PMI, FHA loans and special programs for first-time buyers.
  6. Budgeting

    The 7 Best Ways to Get Out of Debt

    Obtain information on how to put together and execute a plan to get out of debt, including the various steps and methods people use to become debt-free.
  7. Credit & Loans

    Getting Government Loans For Your Small Business

    Would a government loan provide a more cost-effective way to finance your business? See whether your company qualifies for a government loan.
  8. Budgeting

    10 Ways to Save Money at the Farmers' Market

    Strategic shopping can help your budget as well as your health.
  9. Savings

    6 Ways to Save Money on Back-to-School Stuff

    Those school-supply lists just keep getting longer each year. Here's how to shop smart.
  10. Credit & Loans

    Your Credit Score: More Important Than You Know

    Credit scores affect key aspects of your personal and professional life. Knowing your score and managing your credit input can make a big difference.
RELATED TERMS
  1. Car Title Loan

    A short-term loan in which the borrower's car title is used as ...
  2. Debt/Equity Ratio

    1. A debt ratio used to measure a company's financial leverage. ...
  3. Regional Asset Liquidation Agreement ...

    An agreement between an asset manager and the Federal Deposit ...
  4. Accelerated Resolution Program ...

    A program designed to reduce the time and cost of resolving failed ...
  5. Personal Property Securities Register ...

    A written, public, online record of legal claims to personal ...
  6. Purchase Money Security Interest ...

    A security interest or claim on property that enables a lender ...
RELATED FAQS
  1. Can mutual funds outperform savings accounts?

    A mutual fund can – and should – outperform a savings account. In most cases, it should not even be a close race. Savings ... Read Full Answer >>
  2. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  3. How soon should I start saving for retirement?

    The best answer to the question, "How soon should I start saving for retirement?", is probably, "yesterday," and the second ... Read Full Answer >>
  4. Can I use my 401(k) as a collateral for a loan?

    Although federal Internal Revenue Service, or IRS, regulations prohibit using a 401(k) account as collateral for a loan, ... Read Full Answer >>
  5. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  6. How does the trust maker transfer funds into a revocable trust?

    Once a revocable trust is created, a trust maker transfers funds or property into the trust by including them in a list with ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!