Title Loans: What Are They and How Do They Work
March 22, 2023
What are car title loans?
Title loans are a type of secured loan where the borrower uses their vehicle as collateral to borrow money. With auto title loans, the lender holds onto the title of the borrower's vehicle until the loan is repaid. The amount of the loan is usually a percentage of the vehicle's value, and the borrower must agree to pay back the loan plus interest within a specific time frame, within a specified time range.
Title loans are typically used by people who have limited access to other forms of credit. The interest rates on title loans are often very high, which can make it difficult for borrowers to repay the loan. If the borrower is unable to repay the loan, the lender may repossess the vehicle and sell it to recover the loan amount.
It is important to carefully consider the risks and costs associated with title loans before deciding to take one out. It is recommended that borrowers take out a title loan if they are confident that they can repay it on time and are aware of the potential consequences of defaulting on the loan.
How do title loans work?
Here is how the title loan process typically works:
- The borrower applies for a title loan at a lender's office, either in person or online. The lender will ask for information about the borrower's vehicle, including its make, model, year, and condition, and may also request proof of income and identification.
- Based on the information provided, the lender will determine the value of the borrower's vehicle and offer a loan amount. The loan amount is usually a percentage of the vehicle's value, typically ranging from 25% to 50%.
- If the borrower agrees to the loan terms, they will sign a contract and hand over the title to their vehicle to the lender. The lender will hold onto the title as collateral until the loan is repaid.
- The borrower must make regular payments on the loan, typically every 30 days, until the loan is paid off in full. The interest rates on title loans are usually very high, often exceeding 300% APR, which can make it difficult for borrowers to repay the loan.
- If the borrower is unable to repay the loan, the lender may repossess the vehicle and sell it to recover the loan amount. In some cases, the lender may also charge additional fees and interest, which can make the loan even more expensive.
How much do online title loans cost?
The cost of auto title loans depend on several factors, such as the state where you live, the lender you choose, the amount you borrow, and the length of the loan.
In general, title loan interest rates can range from 25% to 300% or more, depending on the lender and the state's regulations. Many lenders also charge fees for processing your loan, such as origination fees, lien fees, and late payment fees.
Compare, for example, how much a title loan can cost versus Yendo:
It's important to note that title loans are typically short-term loans, usually for 30 days or less, and they are secured by your vehicle's title. If you are unable to repay the loan on time, the lender can repossess your car, which can lead to additional fees and legal complications.
Where can you get a title loan?
Title loans are regulated at the state level in the United States, and not all states allow them. The following states currently allow title loans:
- New Hampshire
- New Mexico
- South Carolina
- Washington, D.C.
How do I get out of a title loan?
If you find yourself in the position of having a title loan and need to get out of it, there are options. We've created a post on this topic, "How to get out of a title loan," to provide guidance on potential choices.
In sum, we created Yendo to bring access, transparency, and clarity to the process of borrowing money. And that's why we think Yendo is a better option than a traditional title loan - title loans are expensive, inconvenient, don’t build credit (Experian), and often trap borrowers in debt.
With Yendo you can get:
- The opportunity to build credit.
- Protection against fraud.
- $0 in interest if you pay your full purchase balance on time each month.
- A credit limit of up to $10,000 that is there when you need it.
- If you pay off your full balance and keep your account open, you won’t need to reapply, you can quickly access the cash when/if you need it.
- Approved from the convenience of your smartphone and have access to revolving credit at a 24.99% APR (Annual Percentage Rate), firstly, through a virtual card, then, a physical card.
- Consumer Financial Protection Bureau (CFPB) - Making Ends Meet series: Consumer use of payday, auto title, and pawn loans
- CFPB insights from Making Ends Meet series on payday, auto title and pawn loans
- CFPB - Payday loan protections
- Federal Trade Commission (FTC) - What to know about payday and car title loans
- Title loans in Florida