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Car title loans and auto loans sound deceptively similar, but they actually are entirely different types of loans. An auto title loan requires that you already own a car outright, or have significant equity in it, and it then allows you to borrow money by using that car as collateral. With an auto loan, on the other hand, you’re securing funds to help you purchase a vehicle.There are also critical differences between a title loan vs. auto loan when it comes to interest rates, typical loan terms, and consequences of non-payment. Here’s a closer look at how these two loans compare.
What Is a Title Loan?
When someone owns their vehicle outright or doesn’t owe much money on the vehicle, some lenders will let them borrow funds by using the car as collateral. This is known as a title loan. In general, people can borrow 25% to 50% of the vehicle’s value, with loan amounts ranging from $100 to $10,000.This is a short-term type of financing with repayment often due within 15 to 30 days. If a borrower can’t meet this timeframe, the lender may allow them to take out a new loan with additional interest and fees. If you’re unable to repay the loan, the lender can seize your vehicle in order to recoup their losses.A loan on car titles is allowed in some states but not all, due to their high interest rates.
Title Loan Pros
It can be simple to apply and qualify for a loan on car titles. Lenders typically don’t check your credit, and even if they do, they’ll often approve those with poor credit. In fact, lenders will usually approve the loan if you have the title to your vehicle (or enough equity in it) and sufficient income to meet the lender’s requirements.Additionally, title loans are an option to meet a need for fast cash. You can often walk out with cash on the same day you apply.
Title Loan Cons
Although title loans can be convenient to get, they come with much higher costs than a typical car loan. This is the case even if you pay back your loan on time — and studies suggest that most people who take out this type of loan need to take out a new one on the original loan’s due date. Why? Because they can’t afford to pay for the first one. This cycle can continue to repeat itself as further fees and interest are added with each additional loan. And even worse, the borrower’s car could end up getting repossessed if they’re unable to pay.
Title Loan Payment Plan
Individual lenders can decide how to structure their payment plans. But according to the Federal Trade Commission (FTC), this is what a typical title loan looks like: the average monthly finance fee is 25%, which equals an annual percentage rate (APR) of about 300%. There may also be fees involved, including loan origination, processing, and document fees. Some lenders will also require that you buy roadside service plans or other add-ons.The FTC provides this example of a title loan payment plan:
Loan amount: $1,000
Term: 30 days
Finance fee: 25%
When the loan is approved and papers signed, the borrower hands over the car title and receives $1,000. In 30 days, the amount due is $1,250, plus any fees the lender charges. If that payback is not possible, the lender may allow a rollover loan. Here’s an example from the FTC of what that would look like:
The original $1,000 is rolled over for another 30 days.
Another $250 in finance fees, plus any other fees, is added to the balance.
Thirty days after the rollover, the borrower owes $1,500 ($1,000 borrowed, plus two sets of $250 finance charges), as well as any other fees.
The FTC notes that a borrower can have their vehicle repossessed even after making partial payments. The lender may even install a GPS system and a starter interrupt device to make it easier for them to disable the ignition remotely, locate the car, and repossess it. The lender can then resell the vehicle. In some states, the lender can keep all the money from the sale, even if they sell the vehicle for more than what the borrower owes.
What Is an Auto Loan?
When you’d like to buy a vehicle, either new or used, you can seek financing from the dealer or from a bank, credit union, or online lender to help pay for the vehicle. You’ll then pay back the amount borrowed in a series of installments. The amount of these installment payments is based on the original loan amount as well as the interest rate and loan term.Each payment will contain both principal (a key piece of terminology for car loans to know) and interest. The principal portion of the payment will lower the amount owed, while the interest will go to the lender. In other words, interest is effectively how the borrower “pays” the lender for lending them the money upfront.
Auto Loan Pros
If you’re in need of a vehicle and can’t purchase it with cash, then an auto loan is the typical next step. Interest rates are relatively low — much lower than the rate for car title loans — and as long as you can comfortably include the car payment in your budget, a car loan is a reasonable way to pay for the transportation you need.Car loans allow you to cover the cost of a vehicle over a longer period of time, with the average loan term in 2022 being 70 months, according to sales data from online automotive resource Edmunds. Plus, taking out a car loan and making payments on time can help you to build your credit.
Auto Loan Cons
You will pay interest on the money borrowed through an auto loan and, the longer the term of the auto loan, the more interest you’ll pay over the life of the loan. Credit scores will matter when applying, and those with lower scores may pay higher interest rates. Plus, if you can’t make payments on time, this can damage your credit score.Another downside of auto loans is that the vehicle is usually used as collateral on the loan, which means that the lender could repossess the vehicle if you default on the loan. Defaulting on an auto loan will also further damage your credit score. That being said, there are different types of auto loans, and some lenders may offer unsecured auto loans where the vehicle is not used as collateral.As another consideration, cars generally depreciate in value. If a down payment isn’t made or it’s small, you may end up owing more on the vehicle than what it’s worth. This can be a challenge if you try to refinance your auto loan down the road. Recommended: Tips for Auto Loan Refinancing
Auto Loan Payment Plan
With an auto loan, payments are based on a few factors, including:
The loan amount: This is the cost of the vehicle and any fees, minus the down payment made and any fees paid upfront.
The loan term: This is the length of the auto loan.
The loan’s interest rate: This is the cost of borrowing funds.
By using a loan calculator online or talking to a lender, this information will allow you to determine the total principal and interest payment you’d make each month on an auto loan. As mentioned, some of each payment will go toward the principal and toward the interest. Payments toward the principal reduce the auto loan’s remaining balance, while interest payments will go to the lender. As the balance goes down, less money goes to interest. As an example, let’s say you purchase a vehicle that costs $30,000. You put down $3,000 as a down payment, and then take out an auto loan to cover the remaining $27,000. Your interest rate on this loan is 5%, with a term of 60 months and monthly payments of $509.52. If all payments are made on time with no early payments, the interest over the life of the loan would total $3,571, for a total payback amount of $30,571.Using July 2022 as a start date, here’s how the balance and monthly interest amounts would go down after each year:
July 2022:
Interest payment: $113
Principal payment: $397
Balance: $26,603
July 2023:
Interest payment: $92
Principal payment: $417
Balance: $21,708
July 2024:
Interest payment: $71
Principal payment: $439
Balance: $16,562
July 2025:
Interest payment: $48
Principal payment: $461
Balance: $11,153
July 2026:
Interest payment: $25
Principal payment: $485
Balance: $5,467
June 2027:
Interest payment: $2
Principal payment: $507
balance: $0 (loan is paid in full)
Title Loans vs. Auto Loans
Here’s a side-by-side look at how a title loan vs. auto loan compare:
Title Loans
Auto Loans
Can provide you with fast cash in exchange for a car title
Can be used to buy or refinance a vehicle
May not require a credit check, or lenders will accept borrowers with poor credit
Will typically require a credit check and have certain credit score requirements
Generally have short terms, like 30 days
Can have longer terms, with the average being 70 months
Have high interest rates and possibly hefty fees
Have much lower interest rates compared to title loans
Can lead to rapid vehicle repossession if partial or no payments are made
Can lead to repossession if the borrower defaults on the loan
The Takeaway
Title loans and auto loans are used for different purposes. Auto title loans more closely resemble a payday loan, with a lender providing quick cash in exchange for the vehicle’s title and high interest rates. Auto loans typically have a lower interest rate compared to loans on a car title. With auto loans, a borrower will typically make payments over a longer term (usually years) on a loan taken out to help purchase a vehicle or refinance an existing auto loan.When refinancing a car loan at Lantern by SoFi, you’ll fill out one short application and pay no application fee to receive offers from trusted lenders in our network. This makes it easy to compare competitive rates from these lenders. If you decide to move forward, Lantern will handle paying off the old lender and re-titling the vehicle so you can skip a day at the DMV.Compare your car refinance rates with Lantern by SoFi.
Frequently Asked Questions
What is the difference between title loans vs. auto loans?
What are the pros of a title loan and auto loan?
What are the similarities between title loans vs. auto loans?
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About the Author
Kelly Boyer Sagert
Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.
