A car title loan is a short-term loan for which the borrower's vehicle is used as collateral. The typical repayment term is 30 days and, unless restricted, the typical interest rate is 250% to 400%. Online lenders have quoted rates as high as 651% for car title loans.
The amount of the loan is usually a few hundred dollars, but it can be a few thousand (the outside amount you can get is usually limited to about half the vehicle's value). If the loan is not repaid, the lender has the right to take possession and ownership of the borrower's vehicle.
Many states do not allow car title loans because they are considered to be a type of predatory lending – meaning a loan product that is abusive because it exploits borrowers who can least afford the very high fees and rates. In fact, car title loans are prohibited more than 20 states, according to the Center for Responsible Lending. Other states impose an APR cap on how much borrowers can be charged for this type of loan. Proponents defend title loans as a financial product that meets a need for consumers who may have nowhere else to turn for quick cash relief.
States That Allow Loans
Car title loans are legal in the following states, with various limitations. Fee and interest rate limits are noted here, but some states also impose limits on the dollar amount of the loan, the length of the repayment period, and how refinancing or "turning over" the loan is handled. These laws change periodically: If your state is not on this list, check online to see whether title loans are permitted.
- Alabama (300% APR)
- Arizona (204% APR on first $500; 180% on the next $2,000; 156% on the next $2,500; 120% on the remaining balance)
- Florida (30% APR)
- Georgia (300% APR for the first three months; 150% thereafter; lien fee)
- Mississippi (300% APR)
- New Hampshire (300% APR; lien fee)
- New Mexico
- Rhode Island
- South Dakota
- Tennessee (cost is limited to 1/5 of loan amount plus 24% APR)
- Texas (120% APR)
- Virginia (264% APR on first $700; 216% on next $700; 180% on remaining balance; lien fee)
States That Allow Loans via Loopholes
In some states, car title lending is practiced via legal loopholes that permit variants of these loans. Those states include:
- California (loans over $2,500 are not subject to small-loan limits)
- Kansas (car title loans are sold as open-ended credit lines)
- Louisiana (loans over $350 and for longer than two months are not subject to restrictions)
- South Carolina (loans over $600 are not subject to small-loan limits)
Some states have imposed such tight restrictions on car title loans that few lenders operate there. For example, in Florida the APR is capped at 30%.
Many states have laws in place that limit the loan amount and other terms. For example, in Illinois, the loan limit is $4,000 and payments may not exceed 50% of the borrower's gross income. Furthermore, the loan must be repaid in equal installments; lenders may not require a balloon payment. Also, the loan may not be refinanced unless at least 20% of the principal balance has been paid down, and the refinance limit is the outstanding balance (no cash out). Finally, lenders are required to inform borrowers of their rights and responsibilities, and of their other options for debt management.
Regulations vary widely state-by-state and may have changed. Prospective borrowers should check with their state's attorney general's office for its most current rules and restrictions on car title loans. For more information, see Getting A Car Title Loan and Car Title Loans: Good Option For Fast Cash?