Car title loans: how they work and what they cost

How a title loan works

You show the lender your vehicle, the title, proof of insurance and photo ID; some lenders also ask for a copy of your keys or sell add-ons such as roadside service (Consumer.gov ↗). Usually you must own the vehicle free and clear, though some lenders accept a title when most of a car loan is paid off (FTC ↗).

You keep driving the car, but the lender holds the title until you repay what you borrowed plus the finance charge and any other fees (FTC ↗). The amount is based on the car’s value, not on a credit score.

What it costs

The FTC says title loans often carry monthly finance fees as high as 25% — roughly 300% APR — and that lenders may add processing, document and origination fees to the loan amount (FTC ↗). By federal law the lender must show the cost in writing, including the APR, before you sign (FTC ↗).

Our arithmetic, before any extra fees. Renewal rules and fee caps differ by state.

What the CFPB found

• More than four in five single-payment title loans were renewed on the day they were due because borrowers could not repay in one payment (CFPB ↗).
• One in five borrowers had their car or truck seized by the lender.
• More than two-thirds of title loan business came from borrowers who took out seven or more consecutive loans.
• At the time, single-payment title loans were available in 20 states, and five more allowed only installment title loans.

The study covered nearly 3.5 million loans made in 2010–2013 (full report ↗). Industry researchers disputed the repossession rate; we report the CFPB figure as published.

If you cannot repay: repossession

The lender can repossess and sell the vehicle. In some states lenders can keep all the money from the sale, even if it is more than you owed (FTC ↗). Other states require notice of the sale or let you buy the vehicle back or reinstate the loan (FTC: repossession ↗).

If a repossession is reported, it can stay on your credit reports for up to seven years (CFPB ↗). Losing the car can also cost you the way you get to work.

Servicemembers

For active-duty servicemembers and their dependents, federal law limits the Military Annual Percentage Rate on many kinds of credit, including car title loans, to 36% (FTC ↗).

Before you sign

1. Ask for the total repayment in dollars and the APR, in writing.
2. Ask what happens on the due date if you can pay only the fee, and whether your state allows renewals.
3. Ask whether the lender keeps any surplus if it sells the car.
4. Refuse add-ons you do not need, and keep a copy of everything you sign.

Cheaper options to try first

• Ask the company you owe for more time or a payment plan — the FTC lists this first among cheaper options (FTC ↗).
• A payday alternative loan from a federal credit union: APR capped at 28% and an application fee of no more than $20.
• A bank or credit union personal loan paid back in installments.
• A cash advance app for a small gap until payday — check the express fee and any membership.

Questions

Can I get a title loan if I still owe on my car?

Usually not — most title lenders want the vehicle owned free and clear, though the FTC notes some accept a title when most of the car loan is paid off.

Does a title loan check credit?

The loan is based on the car’s value, so many lenders do not rely on a credit score. That is also why the cost can be high and the car is at risk.

Is a title loan cheaper than a payday loan?

Not necessarily. Both cost hundreds of percent APR; a title loan adds the risk of losing your car. See payday vs title loans.