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. 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. Retirement

    Suddenly Pushed into Retirement, How to Handle the Transition

    Adjusting to retirement can be challenging, but when it happens unexpectedly it can be downright difficult. Thankfully there are ways to successfully transition.
  6. Credit & Loans

    Best 3 Online Auto Loan Calculators that Include Tax

    Learn where you can find the best auto loan calculators online that include sales tax, and understand the different features these calculators offer.
  7. Budgeting

    Preventing Medical Bankruptcy

    If you’re worried medical expenses could overwhelm you, there are some thing you can do to ease your concerns.
  8. Savings

    How Parents Can Help Adult Children Buy a Home

    Owning a home isn't easy thanks to stringent lending standards. Thankfully, there's ways parents can help their kids buy a home.
  9. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  10. Entrepreneurship

    How Pawnshops Make Money

    Learn about the various ways that a pawn shop makes money, including the primary revenue sources of making personal loans and selling retail items.
  1. Can personal loans be included in bankruptcy?

    Personal loans from friends, family and employers fall under common categories of debt that can be discharged in the case ... Read Full Answer >>
  2. Are personal loans tax deductible?

    Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
  3. Are personal loans bad for your credit score?

    Taking out a personal loan is not bad for your credit score in and of itself. However, there are several factors that come ... Read Full Answer >>
  4. Can Sallie Mae loans be forgiven?

    Sallie Mae loans, similar to other private loans, cannot be forgiven. As of 2015, there is no option for private student ... Read Full Answer >>
  5. Can Sallie Mae loans be consolidated?

    Sallie Mae loans can be consolidated with other federal loans, but not with private loans. For federal loan consolidation, ... Read Full Answer >>
  6. Are Sallie Mae loans considered federal loans?

    Sallie Mae is a private lender, so its direct loans are not federal loans. Basically, federal student loans consist of money ... Read Full Answer >>
Trading Center