Car title loans offer you quick cash — often between $100 and $10,000 — in exchange for your vehicle’s title as collateral. They’re a type of secured loan, one backed by property the lender can take if you don’t pay.
Half the states in the U.S. allow some form of auto title loan. But their fee-heavy structure and annual percentage rates of 260% or more make them unaffordable for most borrowers. In fact, many end up renewing their loans several times and setting off a cycle of debt.
Laws and practices vary among states, but generally car title lenders:
- Don’t check credit.
- Don’t have to require proof of income.
- Require that the car be owned outright.
- Provide loans worth 40% or less of the car’s value.
- Can require that borrowers leave a key or install a GPS tracker or a remote immobilizer — all of which make cars easier to repossess.
- Can repossess and sell the car, then charge the borrower fees for the repossession and storage. If the car sells for more than what’s owed, some states don’t require the lender to refund the borrower the difference.
How car title loans work
A prospective borrower heads to the lender with the car and its title. The lender assesses the car’s value and offers a loan based on a percentage of that amount. The average loan is $1,000, according to the Pew Charitable Trusts. Borrowers can drive away with the money in less than an hour, but the lender holds on to their title as collateral until the loan is repaid.
There are two kinds of car title loans: Single-payment loans require borrowers to repay in one lump sum, usually 30 days later, and have an average APR of 300%. There are also installment loans, which let borrowers make multiple payments, usually over three to six months, and have an average APR of 259%.
A larger payment of final fees and remaining principal typically comes due at the end of the loan’s term. These fees often total around 25% of the loan’s value; if you took out a $1,000 single-payment loan, you’d have to pay $1,250 on the due date.
“In our research on auto title loans, we found that many products may be marketed for a short-term financial emergency, but the long-term cost of the loan can often make a bad situation worse,” says Sam Gilford, a spokesperson for the Consumer Financial Protection Bureau.
Why car title loans can be dangerous
Think of car title loans as payday loans’ bully brother.
While their interest rates are lower than those of payday loans, which can have APRs upward of 1,000%, car title loans’ interest rates are by no means low. Thirty-six percent APR is generally considered the upper range of “affordable.” The fees and cyclical borrowing associated with car title loans make them even more expensive.
And if you can’t pay as agreed, you might lose your vehicle. In fact, 20% of those who take out a short-term, single-payment car title loan will have their cars repossessed, according to a report from the CFPB.
“You’re not just paying an outrageous interest rate — you risk losing your car,” says Liz Weston, a NerdWallet columnist and financial advisor. “The repossession rate on these loans is incredibly high, and people lose their jobs because they can’t get to work.”
A cycle of debt
In order to keep their vehicles when they can’t pay, the vast majority of single-payment loan borrowers renew their car title loans multiple times, incurring fees each time.
Just 12% of single-payment borrowers repay without renewing the loan, according to the CFPB. One-third of the remaining borrowers renewed their loans seven or more times. For a $1,000 loan, that would mean at least $1,750 in fees alone.
A 2015 report from the Pew Charitable Trusts found the majority of single-payment loans made are renewals. In fact, 84% of car title loans in Tennessee were renewals during the time period Pew studied.
“What leads to repeat borrowing is large payments,” says Alex Horowitz, a senior researcher at Pew.
For the average borrower, Horowitz says, “repaying an auto title loan takes up 50% of monthly income, so repaying that loan in a balloon payment is untenable. Consumers end up taking out another loan to cover their expenses because they can’t afford to repay without reborrowing.”
The average single-payment borrower holds on to the loan for five months, Horowitz says. Nearly half finally paid off their loans with a cash infusion like a tax return. For 20%, borrowing money from a family or friend ended up being the way they could afford to pay off their loan.
The situation is also bad for installment car title loans. While borrowers can make their payments over a number of months, 31% end up defaulting on their loans, the CFPB found. Eleven percent have their vehicles repossessed.
“The threat of repossession compels borrowers to repay, even though the payments exceed what they can afford,” Horowitz says. Most borrowers take on auto title loans to cover basic, day-to-day expenses, such as medical bills and groceries — but then often have to cut those expenses to pay off the loan.
Alternatives to car title loans
Despite the risks, these loans are increasing in popularity across the country. In California, the number of car title loans taken out jumped 178% from 2011 to 2014. Illinois saw a 78% increase in car title loans taken out from 2009 to 2013, according to the CFPB.
But there are quick-cash options that will cost you less — and be less risky — than a car title loan.
First, try raising some money. Whether it’s selling old electronics or taking up a side job, there are a few creative ways you can get quick cash. You can also sell possessions or borrow against them at a pawnshop. Pawnshop loans tend to have lower APRs than car title loans (although still in triple digits), but if you can’t repay, you’re losing a personal item like jewelry or a camera rather than your transportation.
If raising money proves difficult, try asking your family or friends for a loan. Because so many auto title loan borrowers ended up tapping their personal networks for cash to pay off their loans anyway, it might make sense to start there.
There are also other personal loans. Even if you have bad credit, these loans will cost you less in the long run than an auto title loan. Some credit unions offer car title loans with interest rates around 25% APR for their members.
“Our general advice for anyone considering taking out a loan is to make sure you A) understand the terms and conditions of what you’re signing up for, and B) you consider whether it is the best alternative for you,” says Sam Gilford of the CFPB.
Sean Pyles is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org.