Title Loans

Even riskier than a payday loan!

Falling behind on a loan payment is bad no matter what. There are fees and extra interest to pay, and that’s just to start. If it goes long enough, you may be reported to a collection agency, and what happens then? Harassing phone calls, maybe a lawsuit. And you better believe your credit score will take a hit.

But now imagine another scenario. It includes all of the above, but in addition, you lose your car. You walk out of your door and look up and down the street and it’s not there anymore. Why? Your lender ran off with it in the middle of the night.

It’s unbelievable—a nightmare. But that’s exactly what can happen if you take out a title loan.

What is a Title Loan?

A title loan is a type of loan that you secure with the title to your car. Typically, you receive a few hundred dollars and agree to pay it back in full—along with interest and fees—in two weeks to a month.

Title loans—also known as pink-slip loans—are risky for several reasons. For one, their interest rates are high—300 percent is common. On top of that, you’re usually only given a few weeks to pay everything back.1 The combination of high rates and a short term means that many borrowers get trapped in a cycle of debt. They can’t repay the loan, so they roll it over, racking up extra interest and fees.

How often does that happen? A lot. More than eighty percent of loans are rolled over.2

Title loans, like payday loans, are considered a form of predatory lending. But what sets them apart is that if you default, your lender can repossess your car and sell it. Is it worth the risk? Definitely not, especially when there are better options.

How do Title Loans work?

Title loans are offered in storefronts and online. When you apply for one, the lender will assess the value of your car and offer a loan based on how much they believe it’s worth. (Usually, you’ll get 25 to 50 percent of its assessed value.)2 A typical title loan will be due in two weeks to a month, at which point you’ll have to pay back the loan—as well as interest and fees—in its entirety. On average, if you borrow $500 for 30 days, you’ll have to pay back $625.20.

What happens if I miss a payment on a Title Loan?

If you can’t make your payment, the lender may give you the option of rolling over your loan. This means that you pay the interest and the lender gives you another month to pay back the full amount you borrowed. However, because you extend the loan for an extra month, you have to pay the interest and fees all over again. And see what just happened? Your interest rate just doubled. You paid the lender but didn’t pay off the loan, and this can happen again, and again, and again.

Or the lender could simply let you default on your loan so that they can “repossess” your car.

Nobody should be put in that position.

How does Title Loan repo work?

In many states, a lender can repossess your vehicle as soon as you default. This means they physically take your car, and how do they do it? Well, they might tow your car, or they might simply unlock the door and drive away. (A recent study found that 75 percent of borrowers give title lenders a copy of their keys when they take out their loan.)3 Some lenders have even been known to install a GPS in their borrowers’ cars. That way, they can remotely locate—and disable—your vehicle if you default.3

After your car is repossessed, the lender will then put it up for sale to recoup the money you owe on your loan. In some states, lenders are required to pay you the difference between what they receive and the amount you owe. In other states, however, the lender can keep all of the profit—even if you only owe a couple hundred bucks and the car is worth thousands.3

Are Title Loans legal?

Believe it or not, title loans are legal in the following states: Alabama, Arizona, California, Delaware, Florida, Georgia, Idaho, Illinois, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Mexico, Ohio, Oregon, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, and Wisconsin.4

However, because they’re so risky, a number of states have banned them. To report a lender offering title loans in a state where they’re outlawed, contact the Federal Reserve.

Are Title Loans bad?

Title Loans are about as risky as they come, so yes, they’re bad. Their interest rates extend well into the triple digits, and their short terms mean that many borrowers are unlikely to pay them off. In fact, up to 11 percent of title loan borrowers wind up losing their vehicle, and countless others find themselves in debt many times beyond what they originally intended to borrow.5

Bottom line:

If you have bad credit and need a loan, chances are you’ll find yourself denied by traditional lenders. Banks and credit unions offer low rates, but if your credit score is too low, you won’t qualify.

Many people with bad credit turn to title loans and payday loans—two notorious forms of predatory lending—because they think they don’t have other options.

But they do.

Before you consider a dangerous title loan designed to trap you in debt or claim your car, consider borrowing money from friends or family, cutting back on unnecessary expenses, or taking out a legitimate personal installment loan.

Avoid title loans. You don’t want to risk your ride.

Works Cited:

1 “Car Title Loans.” Federal Trade Commission, July 2014, https://www.consumer.ftc.gov/articles/0514-car-title-loans. Accessed 25 April 2017.

2 “Single-Payment Vehicle Title Lending.” Consumer Financial Protection Bureau. Accessed May 5th, 2017 from http://files.consumerfinance.gov/f/documents/201605_cfpb_single-payment-vehicle-title-lending.pdf.

3 Neiger, Christopher. “Fast Cash, Big Problems with Car Title Loans.” CNN, 28 Sept. 2007, http://www.cnn.com/2007/LIVING/wayoflife/09/26/title.loans/index.html?_s=PM:LIVING. Accessed 25 April 2017.

4 Weisbaum, Herb. “Auto Title Loans Riskier Than Payday Loans, New Report Says.” NBC News, 25 March 2015, http://www.nbcnews.com/business/consumer/auto-title-loans-worse-payday-loans-new-report-says-n330056. Accessed 25 April 2017.

5 “Auto Title Loans: Market Practices and Borrowers’ Experiences.” The Pew Charitable Trusts, March 2015, http://www.pewtrusts.org/~/media/assets/2015/03/autotitleloansreport.pdf. Accessed 28 April 2017.



Texas: The Wild West of Auto Title Lending
July 20, 2016

Title Loans: Risk, Rollover, and Repo
Ann Logue, MBA, CFA
June 20, 2016

Protect Yourself from Title Loans – Q&A with Ann Logue, MBA, CFA
Ann Logue, MBA, CFA
June 21, 2016

From our Blog