How Do Title Loans Work, And Are They Worth The Risk?

All loans come with risks if they’re not repaid on time. However, a car title loan carries an especially troubling consequence if you fail to meet your payment obligations: The lender can take your vehicle.

Still, this significant downside doesn’t stop consumers from considering these loans. In 2023, roughly 3.7 percent of consumers took out auto title loans, according to a Consumer Financial Protection Bureau report.

Before you consider getting a title loan, understand the potential drawbacks of using your vehicle as collateral to borrow money.

What are car title loans?

A car title loan, or “pink slip loan,” allows you to borrow anywhere from 25 percent to 50 percent of the value of your vehicle in exchange for giving the lender the title to your vehicle as collateral.

Car title loans cater to consumers with past credit challenges who need fast cash. Most lenders have little to no credit requirements — some won’t even check your credit. The application process is usually simple, and, if approved, you can expect to receive funding as soon as 24 hours later — sometimes even sooner.

• Loan terms: These short-term loans typically start at $100 with repayment periods of 15 to 30 days.
• Borrowing costs: Title loans come with steep fees compared to the amount borrowed, which lead to high annual percentage rates (APRs). Some states limit how much lenders can charge, while others have no restrictions.
• Accessibility: If you live in one of the 25 states where car title loans are allowed, you will generally need to own your car outright to obtain a loan, although some will approve you if you owe a small amount. There are 12 states that offer these loans with restrictions.

How do title loans work?

Car title loans use your vehicle as collateral, including cars, motorcycles, boats and recreational vehicles. Some are single-payment loans, meaning the borrower must pay the full amount of the loan plus any fees within a month or so. Installment loans can be paid back over three or six months, depending on the lender.

You can apply online or in person, but you’ll need to visit a physical location to show your car to the lender. Also, prepare to provide the lender with a clear title, proof of insurance and a photo ID when applying for a car title loan. The lender may also want a set of keys. The car will remain in your possession during the repayment period unless you default on the loan.

To illustrate how these loans work, assume you own a car worth $5,000, and you find yourself in an emergency and need $1,000, which is 20 percent of what your car is worth. This convenience comes at a cost, though, with an average finance fee of 25 percent. So, on a $1,000 loan, you’ll pay an additional $250 in interest even if the loan is repaid in just 30 days.

Some lenders also charge origination, processing and document fees, driving the borrowing costs even higher. You may also be required to obtain and pay for a roadside service plan for your vehicle.

Downsides to title loans

While getting a title loan may be easy, the convenience is tied to serious costs and risks.

“If you can’t pay back the loan when it’s due, it’s rolled over into another cycle with more fees,” says Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling. “It creates a very difficult situation for people who are already struggling to repay. It is the exact definition of the cycle of debt.”

The biggest downside, though, is the potential to lose your car. If you can’t repay the loan, the lender can take your vehicle and sell it to recoup their money. And this isn’t all that uncommon. A study by the Consumer Financial Protection Bureau found that 20 percent of those who take out title loans have their vehicles seized.

Even worse, “some car title lenders install a GPS device — nicknamed a ‘kill switch’ — that can prevent the borrower’s car from starting, using this practice as a means of collecting a debt or making it easier to seize the car,” adds Graciela Aponte-Diaz, director of federal campaigns at the Center for Responsible Lending. Given the very real risk of losing your means of transportation, it’s easy to see how a title loan can be a stressful experience.

Alternatives to title loans

Despite the serious downsides, some consumers aren’t convinced they can get approved elsewhere. In fact, a CFPB study found that 48 percent of payday, pawn and car title borrowers avoided applying for other forms of credit.

However, McClary recommends reaching out to traditional banks and credit unions to identify less costly lending options. Or you can use a credit card if you have one available to meet your short-term cash needs.

Even if you don’t have a bank account, have a lower credit score or have struggled with poor financial decisions in the past, it’s worth investigating all your alternatives.

“It’s interesting how flexible these traditional lenders can be,” McClary says. “There are a lot of credit unions that are willing to work with unbanked customers.”

Apply for a personal loan

Although qualifying for a personal loan can be challenging if you have bad credit, you may have options. Some online lenders feature bad credit loans you could be eligible for.

If you’re a credit union member, you can also try explaining your situation to a banker. Credit unions may loan to you based on the strength of your relationship and good banking history. Or you can ask a friend or relative with a steady source of income and strong credit rating to apply with you as a cosigner, strengthening your approval odds.

Seek a payday alternative loan

Payday alternative loans are another less costly option to consider. They’re available through some credit unions, but you must be a member to access this loan product. Loan amounts range from $200 to $2,000, payable over one to 12 months.

The application fee is capped at $20, and you’ll pay no more than 28 percent in interest — less than some bad credit personal loan rates. This makes payday alternative loans more affordable than most car title loans.

Use a credit card

You can also use a credit card for a dire financial emergency. Or you can pull funds from your credit card through a cash advance.

Be mindful that the interest rate for cash advances is usually higher than you’ll pay for purchases — up to 30 percent variable, compared to an average purchase APR of 20.15 percent variable as of Jan. 17, 2025. Plus, there’s no grace period and interest will start accruing right away. Expect to pay an ATM fee to withdraw funds.

McClary rarely advises adding to credit card debt but says it’s a better option than a title loan, as you’re likely to pay far less interest.

Bottom line

Car title loans are a convenient option for getting fast cash. Still, the costs are usually not worth the risk involved, and you could end up in a far worse position than you were before taking out the loan. Consider more affordable alternatives, like a credit card, personal loan or payday alternative loan, before settling on a car title loan. Check installment loan rates before you apply and compare lenders.

But if you’ve exhausted all your options and must use a car title loan, read the fine print. Title lenders must show you loan terms in writing before signing, and federal law requires that they be honest and upfront about the loan’s total cost. If you feel the lender isn’t disclosing all the details, take your business elsewhere.

Frequently asked questions

• Does a title loan affect my credit scores?
  

  In most instances, no, as auto title lenders generally don’t perform credit checks or report to the credit bureaus. However, defaulting on a title loan can have serious consequences for your credit scores.

• Are title loans allowed in every state?
  

  No, title loans are only currently allowed in 25 states. Restrictions apply in 12 of those states.

• Is it smart to use my car as collateral for a loan?
  

  Title loans should only be used as a last resort. You risk incurring hefty fees or, even worse, losing your vehicle if you’re unable to make timely payments. If you do move forward with a loan, only borrow what you can comfortably afford to repay to protect your asset.