What Are Title Loans and How Do They Work?

Lauren WardUpdated December 9, 2023

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Title loans are a form of funding in which you use your vehicle title as collateral in exchange for the loan funding. It’s typically used by borrowers who need financing but have bad credit and don’t qualify for other types of personal loans.In business, title financing is typically used to borrow funds for purchasing equipment. Because title loans are secured, there’s a large amount of risk involved for the borrower, who could lose the vehicle if they default. If you’re considering this kind of loan, it's important to understand how they work and what other alternatives you might consider before you apply.

How Do Title Loans Work?

Typically, a title loan is a short-term loan that needs to be paid back within a small window of time, often around a month. The application and approval process are easy and may not require a credit check — which should be your first red flag. With a title loan, you have to hand over the title to your vehicle in order to get the cash. You can still drive your car, but it’s in danger of being seized by the title lender if you don’t pay back your loan on time.Title loans can be found both online and from brick-and-mortar lenders. In order to potentially qualify for title financing, you either need to have substantial equity in the vehicle (as in a very small auto loan balance) or, in some cases, you may need to own the car completely. You can typically apply to borrow up to 50% of your car’s current value. Title loans typically include high finance charges that can translate into an annual percentage rate (APR) of 300%, according to the Federal Trade Commission.Recommended: What Is the Highest APR on a Car Loan?

Title Loans Vs. Personal Loans

A title loan is quite different from online personal loans. One of the biggest differences is that a title loan is secured, while a personal loan is typically unsecured (in which case it’s also called a “signature loan”). If you default on a signature loan, you may be held liable for the money you owe, but you usually can’t have your assets seized by the lender to repay the balance.Title financing is also typically much more expensive than a personal loan, with car title loan interest rates reaching triple digits. Plus, you usually have to repay a title loan within 30 days. It’s easy to get trapped in a debt cycle if you can’t make the full payment by that time. You may be able to roll over the loan balance, but you’ll usually incur hefty fees on top of an APR that’s already sky-high.An unsecured personal loan, on the other hand, typically has a fixed rate and a longer repayment period. Your payments may be more affordable because they’re spread out over time. You may incur late fees if you miss a payment, but you don’t have to worry about rolling over your balance — most unsecured personal loans don’t permit the practice.

When to Consider a Title Loan

Title loans are typically used by people with bad credit who can’t get financial assistance anywhere else. The funds are often used to cover an emergency. Generally, a title loan is considered only as a last resort. You should also explore all of your other options before seriously considering title financing for personal use. And it’s certainly not a good idea to take one out for anything that’s not absolutely necessary.

Using Title Loans for a Business

Title loans for business work differently than standard personal title financing. Also called equipment financing, this kind of loan allows companies to borrow funds to purchase equipment. Many commercial industries use equipment, from the bulldozers a construction company may need to the kitchen equipment a restaurant might use to the computers an accounting firm might rely upon. Any of these businesses might take out an equipment loan to purchase these necessities. The equipment is then used as collateral for the loan.Equipment financing rates are typically available with more favorable terms than title loans. Lenders may view these loans as less risky since there’s collateral. Plus, the business generally has to undergo an application process and financial review to make sure the payments are affordable. You may have anywhere from a few months to 10 years to pay the loan back, depending on the lender. It is possible to get business equipment financing with bad credit, but rates are typically higher than borrowers with good credit. Lenders may also review how long a company has been in business when determining whether or not to extend the loan offer. You can usually see the minimum application requirements on a lender’s website so that you can compare equipment financing companies and apply for the business loans most suitable for your needs.

Pros and Cons of Title Lending

The negative aspects of title lending definitely outweigh the positives. But there are factors to consider on both sides.

Pros of Title Loans

Typically no credit check is required
You can get money fast.

Cons of Title Loans

High interest rates and fees
Must be repaid in a short timeframe
Requires that you own your car in full or at least have significant equity in order to qualify
The lender may also require a GPS device to be installed in your car. In the event that you don’t repay the balance, this lets the lender track your vehicle’s location in order to seize it.
While you might be able to rollover your loan into another repayment cycle, you’ll then continually accrue fees on top of the original principal and interest. This can only last so long before the lender decides to take the car.

Alternatives to Title Financing

When you’re stuck in a financial pinch, you may want to consider all of your other options before taking out a title loan. Here are a few to consider:

Cash-Out Auto Refinancing

If you have an active car loan, cash-out auto refinancing can be a way to borrow money by using the equity you have in your vehicle. Potentially, you could also get a lower interest rate on your auto loan, as well.

Contact Creditors

If you’re undergoing financial hardship and having trouble making payments on your normal bills, start off by reaching out to those creditors. You may be able to work out a temporary reprieve in payments or modify loan terms to pay off your debt.

Consider a Credit Card Cash Advance

If you have a credit card that’s not maxed out, you could potentially take out a cash advance. This is not often advised, however. Compare the fees and terms to your other options, however, because you’ll generally be charged a higher APR than your standard credit card interest rate.

Explore Local Bank or Credit Union Loans

Another option is to look for small, short-term loans at local or regional banks and credit unions. You’ll probably be more likely to be approved if you’re already an account holder at the financial institution. If you have some funds in a savings account, one option is to apply for a credit builder loan that is secured by your deposits.

The Takeaway

The first financing option that springs to mind may not always be the best one. Instead, carefully weigh the pros and cons of each option you’re considering. It’s best to try and avoid a title loan if you possibly can. Otherwise you put a lot at risk, including your car and your future ability to manage your money.Unless you are absolutely sure you’ll be able to pay back the loan within the timeframe, a title loan may not be an option worth considering. If you have an active car loan, cash-out auto refinancing may be an option to explore as an alternative to title financing.Lantern by SoFi can help you find auto refinancing offers.

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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