What is a Car Title Loan?

Malcolm Tatum

Car title loans are short term loans that are intended to help people handle unexpected costs by providing cash in exchange for using a vehicle as the collateral for the loan. This loan for car title arrangement usually does not provide a loan amount that is anywhere near the true value of the vehicle. In general, the car title loan is touted as an emergency loan that must be paid off in a relatively short period of time.

Car title loans usually carry high interest rates.
Car title loans usually carry high interest rates.

Car loans of this type usually require nothing more than verification of an active checking account, proof of employment, and a valid and clear title to a vehicle. Some loan companies that provide auto title loans will do a cursory inspection of the vehicle before approving the loan. When everything appears to be in order, the lender approves the car title loan and the vehicle owner signs a contract that spells out the terms and conditions associated with the transaction. The new client is provided with the cash amount specified in the contract on the spot.

A car title loan allows cash to be given upfront in exchange for the car title to be held as collateral.
A car title loan allows cash to be given upfront in exchange for the car title to be held as collateral.

The loan maximum for car titles is normally much less than the actual worth of the vehicle. In addition, the interest rates that apply to the loans are significantly more than a conventional loan that is extended by a bank or similar institution. Payments must be made promptly and without fail. In the event that a borrower is late with a payment, some loan contracts empower the lender to seize the vehicle immediately.

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Many providers of these types of auto loans emphasize that their services should be viewed as emergency loans only. That is, a car title loan may be a great way to secure cash to have unexpected repairs made on a vehicle or to handle some other sort of temporary need. Because a car title loan is usually written as a short term loan, the borrower is expected to pay back the loan plus interest within a matter of a month or slightly more. Even so, it is not unusual for the applied interest rate to work out to be in the triple digits when calculated on an annual basis.

While many providers of the auto title loan provide full disclosure to borrowers before completing the loan application, others do little more than the minimum required by local law. The end result is that borrowers who are in dire need of quick cash may fail to read the terms and conditions thoroughly and thus commit themselves to a car title loan arrangement that they may or may not be able to pay back in a timely manner. In any case, choosing to apply for a car title loan should be something that takes place only after all other avenues of securing short term financial assistance have been exhausted, and only if the borrower is confident of being able to pay off the loan within terms.

Car title loans should typically be used in only emergency financial situations.
Car title loans should typically be used in only emergency financial situations.

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Discussion Comments


Sporkasia - You may be correct about some of the people who use title loan companies, but the companies do serve a purpose. When I was in college and needed a bit of cash to make it to next payday I got a loan with my car title several times.

I paid the loan off on time and got my title back with no problems. It is true that I paid a good bit of interest, but I needed the money immediately when I got the loan and I was pleased with the outcome.

Don't be too hard on these companies. After all, no one forces anyone to get a loan and we are all adults.


Isn't it shameful when car title loan companies charge these high interest rates when giving a cash loans for car titles? The people getting the loans are already in terrible financial situations. Then on top of that they have to pay a criminal amount in interest.

I know we live in a democracy and a capitalistic country, but I think these companies border on the criminal in the way they take advantage of people in need.


Sporkasia - That's one of the main attractions of a loan on a car title--no credit checks. There is no need for a credit check since in most if not all cases you're getting an amount of money that is only a small fraction of the value of your car.

For example, you might put up the title of your car that is worth five thousand dollars in exchange for a $200 loan. If you fail to pay back the money, the car title loan company gets a better deal than if you do pay the loan. Besides, not many people are going to lose a decent car over a couple hundred dollars.


Are credit checks required to get a cash loan on a car title? I thought they were, but from reading the article it sounds like they are not. Am I reading that correctly?

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