Considering a car title loan? Here’s why you should reconsider, along with alternatives to using a title loan. This type of loan comes with super high APR interest rates. And in our opinion, should be avoided at all costs. Let’s dig into it.
- What are Car Title Loans?
- How Do Car Title Loans Work?
- Are Car Title Loans Legal?
- Auto Title Loan Rates and Terms by State
- Car Title Loan Alternatives
- 401(k) Withdrawal and Loans
- How to Get Out of a Car Title Loan
- Debt Management
What are Car Title Loans?
Car title loans are exactly as they sound. This loan type is when you use your care title as collateral. In return, you’ll be eligible for a short-term note that typically is repaid within 30 days. These loans are expensive in nature, carrying with them high annual percentage rates.
Several states do not allow the practice of car title loans because of their less than ideal lending practices. The purpose of a title loan is for short-term borrowing, but it is an extremely expensive and risky loan from the consumers perspective.
From the lenders side, it’s still a risky loan because less than ideal credit worthy individuals are taking the loan out but having the vehicle as collateral is a way for the lender to mitigate their risk exposure.
Beyond those points, the other aspects of the loan should be similar to a traditional loan process. As we continue, you’ll start to understand why these loans are average at best and can put you and your vehicle in a risky financial situation.
Who Uses Car Title Loans?
Now, these types of loans are not marketed towards everyone, but rather a select market.
Those individuals are moderate to low income individuals that are in a financial situation of needing quick, short-term cash. It’s not predatory lending, but many politicians and financial leaders tend to speak of car title loans in that light for these reasons. These types of loans are also expensive, and we’ll get into those details in a bit.
How Do Car Title Loans Work?
Now that you understand what car title loans are, we’ll dive into how they work, as well as what makes them less than ideal.
Here’s what you’ll need to apply for a car title loan, if you so choose:
- Government issued state ID
- Be 18 years of age or older
- Social security number
- Proof of income
- A free and clear title to the vehicle you are going to use for collateral
Each lender might have individualized information they require so be sure to check in with your selected lender.
First, you will select you desired lender and begin the process. Unlike other short-term lenders that are unsecured, you will likely need to visit a physical location because you have to sign over your vehicle title. Other lending products can typically be done online exclusively, giving you the comfort and ease of obtaining a loan in your home.
What Does a Car Title Loan Application Look Like?
From there, you will begin the loan application process and that should be similar to any loan application process throughout all lending products. You will complete the form with your personal information including social security number and proof of income.
Once completed, you will submit your application and wait for your decision. For many places, this should only take a few moments because again, these are short-term loans and many people applying need cash within 24-hours.
Once approved, you will then be given the loan agreement that discloses all the loan details including annual percentage rate, any fees associated with the loan, the repayment amount and how long you have to repay the note.
Car Title Loan Rates and Repayment Terms
This is where you need to be careful because the interest rates on these loans can be in the triple digits. On top of that, the lender may charge you a percentage of the loan as an administrative fee. Combine those together and you are looking at a potentially high repayment amount.
After you’ve signed for the loan you will typically receive either a check, cash or ACH transfer into the account of your choosing. From there you can use the proceeds how you see fit.
When it comes time for repayment, you are likely required to return payment within 30-days of the loan agreement date. Should the event arise where you are unable to repay the note you may have the option to roll the note over to another 30-day note, but keep in mind that means additional fees and interest will be accrued.
You’ll want to repay this as quickly as possible because not only are you paying extremely high interest rates, but your car is being secured as the collateral and the lender may have the rights to repossess your vehicle.
Are Car Title Loans Legal?
The question everyone asks when it comes to less than ideal lending products, is it legit? Yes, car title loans are a very real, legal and legitimate product, if your state allows for car title loans. Again, not every state prohibits car title loans due to their terms and conditions.
Now simply because a product is legit, doesn’t make it a worthwhile product. Some of the reasons you may question the legitimacy of car title loans are the interest rates.
Again, these loan products typically have an interest rate that’s in the triple digits. If you compare that to a more traditional loan such as a mortgage, then the rate may seem unrealistic.
Another reason you may question the legitimacy of a car title loan are some states allow them while others do not. A comparison could be sports betting or weed legalization. While both of those are very real products and services, some states do not see a benefit to that product right now.
However, with car title loans, the industry has been and continues to be put under pressure due to their terms.
Auto Title Loan Rates and Terms by State
|State||Status||Min Loan||Max Loan||Term||Interest|
|Alabama||Legal||No minimum||Varies by lender||30 days||25%|
|Alaska||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Arizona||Legal||No minimum||Varies by lender||No Limit||17%|
|Arkansas||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|California||Legal||$2,500||Varies by lender||No Limit||Varies by lender|
|Colorado||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Connecticut||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Delaware||Legal||No minimum||Varies by lender||180 days||No Limit|
|Florida||Legal||No minimum||Varies by lender||30 Days||30%|
|Georgia||Legal||No minimum||Varies by lender||30 Days||25%|
|Hawaii||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Idaho||Legal||No minimum||Varies by lender||30 Days||No Cap|
|Illinois||Legal||No minimum||$4,000||30 Days||No Cap|
|Indiana||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Iowa||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Kansas||Legal||No minimum||Varies by lender||30 Days||No Cap|
|Kentucky||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Louisiana||Legal||$350||Varies by lender||60 Days||36%|
|Maine||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Maryland||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Massachusetts||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Michigan||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Minnesota||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Mississippi||Legal||No minimum||$2,500||30 Days||25%|
|Missouri||Legal||No minimum||$5,000||30 Days||No Cap|
|Montana||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Nebraska||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Nevada||Legal||No minimum||Varies by lender||30 Days||No Cap|
|New Hampshire||Legal||No minimum||$10,000||Not Specified||25%|
|New Jersey||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|New Mexico||Legal||No minimum||$2,500||30 Days||No Cap|
|New York||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|North Carolina||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|North Dakota||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Ohio||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Oklahoma||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Oregon||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Pennsylvania||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Rhode Island||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|South Carolina||Legal||$601||Varies by lender||30 Days||No Cap|
|South Dakota||Legal||No minimum||Varies by lender||30 Days||No Cap|
|Tennessee||Legal||No minimum||$2,500||30 Days||2%|
|Texas||Legal||No minimum||Varies by lender||30 Days||10%|
|Utah||Legal||No minimum||Varies by lender||30 Days||No Cap|
|Vermont||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Virginia||Legal||Varies by Lender||Varies by lender||120 Days||22%|
|Washington||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|West Virginia||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
|Wisconsin||Legal||No minimum||$25,000||180 days||No Cap|
|Wyoming||Prohibited||Not Applicable||Not Applicable||Not Applicable||Not Applicable|
Car Title Loan Alternatives
If you are someone who is looking for a car title loan, you may want to think twice before going through with the process. As mentioned, with advances in financial technology there have been several different products that have come to market.
In this next section, we’ll go over the various alternatives you can select and discuss why they may or may not be a better option. The goal is to borrow money at the best terms possible, and with car title loans that is unlikely to occur.
Installment Loans for Bad Credit
First on our list of car title loan alternatives are installment loans. There are several options on the market for installment loans, but a common one people might turn to are tribal loans. Keep in mind that the individuals applying for these loans may have average or below average credit, meaning their options could still be limited.
For an installment loan with bad credit, the one issue you’ll still have to contend with are the high interest rates. Interest rates are how a lender hedges themselves against risk, thus a riskier loan equals a higher interest rate.
The process for an installment loan is fairly straight forward, many times with the application being able to be completed exclusively online. You’ll still need personal information and income of typically over $1,000 a month. When you get the loan agreement, you’ll want to check the interest rate to ensure it’s not out of reach for you.
Now, the benefit an installment loan has over a car title loan is, you can payback an installment loan over several months or potentially a year or two. Furthermore, many installment loans are unsecured, meaning should you fail to repay the loan you won’t put your car at risk.
Similar to an auto title loan, an installment loan is meant for a short-term solution and should not be relied upon as a long-term solution as this is an expensive form of financing.
Next on our list of alternatives are micro loans, which are small loans upwards of a few hundred dollars that are repaid quickly. This methodology is slightly less common because people are typically looking for $1,000 to $3,000.
However, if you only need a quick fix on your vehicle or to cover a utility bill you may want to look at a micro loan.
Alternatively, if you are a business there are micro loans in the business sector as well.
These loans are typically under $10,000 and are used to help underserved business.
However, for this article it is unlikely you are running a business that needs a micro loan.
The idea here is it’s extremely fast and repaid quickly. If you borrow $100 you may have to repay $150, but this is much more manageable than to borrow a few thousand dollars with an interest rates that is in the triple digits.
However, you can also take a micro loan from a friend of family member depending on your situation. The goal of a micro loan is to borrow only what is absolutely necessary.
401(k) Withdrawal and Loans
As we continue moving down our list of alternatives, there’s a pile of money that you may have been saving and contributing towards, and that is your 401(k).
Now, your 401(k) is a delicate source because they are much more involved than simply requesting a distribution. Also, there are two options you can consider when looking to receive funds using your 401(k) plan. First, let us begin with requesting a withdrawal.
If you are in a financial situation where you need cash and are unable to obtain a loan, you can tap into the money you’ve contributed into your 401(k) plan. To begin this process, you will want to talk to your human resource department as they are the ones that likely handle this process.
Now, here is what you need to know before committing to an early distribution from your retirement plan.
Should you decide to take a distribution you will have to pay taxes and you will be penalized for that withdrawal. Taxes will vary slightly but you can typically estimate your taxes to be around 20%. On top of that however, you will be assessed a 10% penalty by the IRS for your early withdrawal.
Put those together and you are looking at a roughly 30% haircut off your proceeds. That means if you take out $1,000 you will likely receive $700 in proceeds.
Not only that, but you need to consider the money you are losing out on in investment earnings. The last thing you want to do is jeopardize your retirement over the need of short-term cash.
Now, if you don’t want to take out money from your 401(k), you may have the option to borrow against it. Taking out a 401(k) loan is when you pledge part of your plans assets as collateral and take a loan out with your employer.
You’ll want to verify this is an option because not all employers offer this type of service. The benefits to this loan are great because you will receive a competitive interest rate and you won’t be requesting an early distribution from your plan.
On top of that, your payments are deducted out of your payroll, so you won’t have to worry about missing a payment.
The one drawback to this loan type however is if you are currently strapped for cash, you may not have enough income to cover a loan payment directly out of your payroll. One of the last things you need to have is your employer asking for money, as this can cause a conflict and make your work environment less than desirable.
Check with your human resource department or place that handles your 401(k) plan.
They’ll be able to answer all your questions regarding a 401(k) loan or withdrawal.
Credit Union Short-Term Loan
Stepping back into a more traditional alternative to car title loans are credit union short-term loans. Credit unions are a wonderful place to go and find competitive rates because they are a non-profit entity.
Furthermore, they are more willing to work with those that have less than ideal credit. Short-term loans will typically come in the form of a personal loan.
How a personal loan works is extremely similar to an installment loan in that your payments are spread over a period of time and the note is unsecured. With a personal loan, your loan amounts may be slightly larger than a bad credit installment loan lender.
To begin the process, you’ll want to visit with your local community credit union. Before you begin, you’ll want to ensure you can become a member of the credit union as some institutions have restrictions on who can join. That’s why when searching, look for a community credit union as they typically have very few restrictions.
Once you’ve selected the credit union you wish to apply with, you may be able to begin to process online, but you will likely be contacted by a representative to complete the process.
Furthermore, you will need to provide proof of income and your credit report will be pulled. Working with a credit union will require a more formal process, but that’s to ensure both you and the credit union are able to take the loan out with normal risk levels.
Once the process is completed and you’re approved, you can begin signing the documents and receiving funds. Again, pay close attention to the annual percentage rate as this is what you will be charged for borrowing the money. With a personal loan through a credit union, you will have a manageable rate with manageable payments compared to current market conditions.
Last on our list of car title loan alternatives is the increasingly popular world of peer-to-peer lending. A peer-to-peer (P2P) loan is when another individual or individuals fund the loan, rather than a large financial institution.
Right now, the name people know when it comes to P2P lending is LendingClub. This is the company that facilitates the application and funding process.
To begin the process, you will go to a P2P lending website and follow their application process. It will include how much you want to borrow, what the loan is for and a few other bits of information.
From there, the company will decide if you are an approved application that can obtain a loan.
Once approved, you will have your loan listed on the marketplace where people can go and invest in your loan by funding it. Some people can invest as little as $25 or fund the whole loan. This portion of the process may take time because it’s up to the individuals to fund the loan.
After your loan is completely funded, you will then be dispersed the funds. As with any loan, you will sign the loan agreement, which will have the typical information of interest rate and repayment information.
When it comes to the interest rate of a P2P loan, it will likely be higher than others in the market but certainly not as high as a car title loan. One benefit is you can view the marketplace and see what other people are getting for the loans and estimate what your rate may be. The variables include your credit score and how much you are wanting to borrow.
P2P lending is certainly an efficient alternative to car title loans and like a personal loan, P2P loans are typically unsecure, meaning your vehicle and home will not be at risk should you fail to repay the loan.
How to Get Out of a Car Title Loan
One of the main issues with a car title loan people always seem to have a problem with is the interest rate, and finding out how high it is after the fact. While they have to legally disclose the interest rate, many car title lenders will wait until the end to disclose that information because they want to make the loan with you.
Now, the problem arises once you’ve accepted the loan and are in a situation where you want to back out.
Unfortunately once you’ve signed the dotted line, you are contractually obligated to repay the loan. However, there are options you can choose to get out of the loan through early repayment.
First, you can look at taking the loan proceeds you received and immediately repay the car title loan. Now doing this will still cost you any fees associated with the loan as well as accrued interest charges.
However, this will allow you to pay off the loan and move on to either a more sustainable borrowing option or simply walking away from loans.
The second option you can utilize is to refinance the loan through one of the options we mentioned. For example, if you took a car title loan for $1,000, you can go to your local credit union and apply for a personal loan for the same amount, using those proceeds to pay off the car title loan and simply make payments to the credit union.
Depending on the loan information, you may have a right of recession period, which is when you can cancel the loan even after you’ve signed it. With a mortgage, you can rescind your request after 3 days, but a car title loan may be different, and it may not be offered at all.
Having an understanding of how inefficient car title loans are is important because the goal with a short-term loan is to help you through your current situation and not make it worse. The underlying issue for many though is having large sums of debt. If you find yourself in this situation, you can look at a few debt management tools and websites that can help you get back on track.
- Dave Ramsey
These links are wonderful tools to help you eliminate debt, rebuild your credit, and refocus on building your financial well-being. The first goal is to eliminate your debt as quickly and effectively as possible.
You can do this through the method Dave Ramsey popularized, the debt snowball, or another method such as the debt avalanche.
If you need even more serious debt relief, you can turn to an accountant or lawyer, depending on your situation. However, no matter your current situation there is a tool and resource out there designed to help you.
Car title loans are a product that is intended to help fix your short-term financial needs.
However, with the seriously high interest rates and unfavorable borrowing terms, for many it simply ends up making the issue worse in the end. Not only that, but by putting your car up as collateral, you run the risk of losing your vehicle if you fail to repay the note.
Instead, look at other alternatives such as bad credit installment loans, 401(k) loans or withdrawals, credit union short-term loans or a peer-to-peer loan. Another alternative would be to simply ask a friend or relative for a short-term loan.
The more you can avoid a car title loan the better.
Also, not every state offers this product due to their unfavorable terms. Lastly, ensure you manage your debt appropriately and attempt to eliminate as much of it as possible. Using these tips, you should be able to overcome your short-term financial stress and promote long-term financial stability.