Title Loan

DEFINITION of 'Title Loan'

A title loan is a loan where an asset is required as collateral, popularized due to two key reasons. First, title loans do not consider an applicant's credit rating when determining qualifications, and second, title loans, thanks to looser application requirements, can be approved very quickly for loan amounts of as little as $100.

BREAKING DOWN 'Title Loan'

The most common form of a title loan is a car title loan. In this case, potential borrowers are required to own a car outright and sign the title over to an auto loan title company. The loan company will loan up to 25% of the car's total value to the borrower and keep the car's title as collateral in case of default.

Typical car title loan amounts are $1,000, although they can be higher. Borrowers can repay the car title loan with a single payment after one month or repay the loan on a two-year installment plan. If a borrower does not repay the title loan in accordance with the repayment agreement, the car can be repossessed immediately by the auto loan title company. The loan company also has the option of letting a borrower in default pay interest-only payments for one-month periods, effectively rolling over the loan amount indefinitely until it's repaid.

The Cost of a Title Loan

Title loans may sound attractive to individuals with no credit or people in financial hardships who need cash fast. However, there are some very high costs associated with title loans, especially car title loans, that may give borrowers pause. First, the annual percentage yield (APR) on an average car title loan can be as high as 300% and is almost always higher than 100% interest. The high APR can cause a financial treadmill where borrowers can never catch up and pay down the loan's principle.

For example, a $500 car title loan that is agreed to be repaid within a one-month period can carry as much as a 300% APR. This means that the borrower will have to pay the car title loan company $625 in principle and interest to repay the debt. For individuals who need $500 fast, paying an additional $125 in interest within a one-month period may cause additional financial hardships.

Using another example, a $5,000 car title loan that is agreed to be repaid in 24 monthly installments can carry an APR of 100% or over. In this scenario, a 24 month car title loan with a 108% APR will cost the borrower $7,394 in interest charges on top of the initial $5000 principle, for a total amount of $12,394.

RELATED TERMS
  1. Car Title Loan

    A short-term loan in which the borrower's car title is used as ...
  2. Clear Title

    Also known as "clean title," "just title," "good title" and "free ...
  3. Perfect Title

    A title deed for real estate that does not have any liens attached ...
  4. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
  5. Cloud On Title

    Any document, claim, unreleased lien or encumbrance that might ...
  6. Certificate Of Title

    A state or municipal-issued document that identifies the owner ...
Related Articles
  1. Credit & Loans

    Getting A Car Title Loan

    This loan-of-last-resort uses your car as collateral and features very high interest rates and fees. Be extremely wary of even considering one.
  2. Credit & Loans

    Car Title Loan Requirements

    Here's a list of what you need to qualify for a car title loan. Most important: having sole ownership of your car with no liens.
  3. Credit & Loans

    Car Title Loan Limits

    You can usually get 25% to 50% of a car's value - but could pay more in interest than you borrowed if the loan rolls over a lot before it's paid off.
  4. Credit & Loans

    States That Allow Car Title Loans

    Only some states permit car title loans – and those that do may have restrictions. Check this list to see what to expect.
  5. Credit & Loans

    8 Top Alternatives to Car Title Loans

    Before you sign up for a car title loan, investigate these 8 alternate strategies.
  6. 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.
  7. Credit & Loans

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  8. Credit & Loans

    Are Car Title Loans Ever a Good Idea?

    Most people knowledgeable about finance consider title loans predatory. What would constitute a good-quality short-term loan? Here's one idea.
  9. Economics

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  10. Credit & Loans

    How Risky Are Long-Term Car Loans?

    A look under the hood of long-term car loans.
RELATED FAQS
  1. What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right ... Read Answer >>
  2. What are the typical requirements to qualify for closed end credit?

    Learn what closed-end credit is, and the various requirements that borrowers must meet in order to obtain a closed-end credit ... Read Answer >>
  3. What are the differences between delinquency and default?

    Find out more about loan delinquency, loan default, and the difference between a loan borrower defaulting and being delinquent ... Read Answer >>
  4. What are the typical repayment terms for a syndicated loan?

    Learn more about syndicated loans and how they are structured, specifically including the typical repayment terms for a syndicated ... Read Answer >>
  5. Which loan should I pay off first?

    I have a $33,000 mortgage at 4.5% interest due in June 2019. I also have $627 in monthly car loan payments for loans that ... Read Answer >>
  6. What are some examples of debts that I can consolidate?

    Read about different kinds of debts than can be combined into a consolidation loan, including unsecured debts, secured debts ... Read Answer >>
Hot Definitions
  1. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  2. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  3. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  5. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center