How does a title loan work?

Published on May 27, 2014

For someone needing quick cash, there are a few options. He can pawn personal possessions or sell them on Craigslist, take out a payday loan if he is employed, or, if he owns a vehicle, he could obtain a title loan.

For many people, a title loan is the most attractive of these options. It doesn't require permanently giving up possessions, and the interest rate is generally lower than on an unsecured payday loan.

What is a title loan?

A title loan is a short-term loan where the borrower pledges the title to his vehicle as collateral. Typical loan amounts range from as little as $100 to several thousand dollars, depending on the borrower's need and the resale value of the vehicle. Most title loans are required to be repaid in full, plus interest, within 30 to 60 days. If the borrower defaults, the lender is able to repossess the vehicle and sell it at auction to recoup its money. Having this recourse available lowers the lender's risk and enables it to offer more attractive loan terms than other short-term lenders such as payday lenders, though the interest rates on title loans are still much higher than on most credit-based bank loans.

Who should consider a title loan?

The best candidate for a title loan is someone who incurs an unexpected expense while low on cash but expects to have the money to repay the loan within a month or two. A title loan should not be used to finance a major purchase that will take a long time to repay, as the interest rate is typically much higher even than a credit card.

How to apply for a title loan?

One of the biggest benefits of a title loan is that it can be obtained in as little as 15 minutes, and the approval process is perfunctory. Most title lenders only require a clean, unencumbered vehicle title (meaning no outstanding liens) and proof of employment or steady income. A credit check typically is not conducted. The lender will examine the borrower's vehicle and use a valuation resource such as Kelly Blue Book to estimate resale value. The borrower is usually eligible for a loan amount up to half of that value, depending on other factors such as income and repayment terms. The paperwork is then signed and the money is disbursed on the spot.