Car Title Loans: What You Need to Know
Car title loans might be enticing, but you should understand them fully before you sign.
Bottom Line Up Front
- Car title loans are low-risk for lenders but have much higher risk for borrowers.
- High interest rates and short terms are common in car title loans.
- If you need fast cash, a personal loan might be a better, lower-risk alternative.
Time to Read
3 minutes
August 4, 2022
When you’re in need of cash, you might be tempted by late-night commercials offering quick cash with only your car as collateral. These loans are most commonly known as car title loans, but go by many names—pink-slip loan, title pledge or title pawn. Is this a smart option? Here is what you need to know.
Lenders Love Low-Risk Car Title Loans
Because your vehicle is put up as collateral, these loans are very low-risk for lending institutions. Your vehicle is almost always worth much more than the amount of money loaned. However, these are anything but low-risk for you. Failing to make your payments could result in the lender taking control of your vehicle.
Car Title Loans Often Involve High Interest Rates
Advertised interest rates on car title loans may not accurately reflect their risk. While some states cap interest rates on title loans, others do not, and loans may have rates of 300% per year, or more! Some lenders also charge additional fees on top of the interest. Be sure to look carefully at any fees and the interest rate when agreeing to a loan.
Car Title Loans Have Very Short Terms
30-day terms are typical for these loans. Unfortunately, a month is often not enough time for most borrowers to position themselves financially. So, these loans are often rolled into another term resulting in more interest charges and other fees—by those who can’t pay them back after the term ends. The longer the loan is outstanding, the more borrowers spend on high interest for these loans. This cycle can be difficult to escape and can ultimately cost borrowers their vehicles—even after paying large amounts on the loan.
Look for Alternative Loan Options
When you need short-term cash, consider whether the risks of car title loans are worth it or not. Take time to explore other options that could cost you less and don’t involve the same risks. One option that people often overlook is a personal loan. It can provide access to cash when you need it, lower interest rates and longer term options than car title loans.
Disclosures
This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.