How Do Car Title Loans Work?

Title loans are very expensive, with interest rates often being 25% per month. While this may seem lower than some personal loans for bad credit, it results in an annual percentage rate (APR) of around 300%. For example, if you borrow $500 you could be charged a 10% interest rate, a $150 finance charge, and a $33 title certification fee. If the loan is paid back in 30 days the total cost could be $688.69 which is a 452.85% APR. The cost can increase even more if you can’t pay on time and decide to roll the loan into a new one which adds even more fees and interest. Loans range from $100 to $10,000 depending on the value of your vehicle and payments are often made in person, online, or by automatic bank payments.

• Make, model, and year. The make, model, and year of a vehicle are primary factors in determining its value. Popular, reliable, or luxury brands tend to have higher values, and newer vehicles generally fetch more due to advanced features and technology.

• Condition of the vehicle. A car’s physical and mechanical condition plays a significant role in its valuation. Lenders assess the vehicle for any damage, wear, and tear, and overall maintenance. A well-maintained car in good condition will have a higher value compared to one with signs of neglect or damage.

• Mileage. The odometer reading is another key factor. Lower mileage means less wear and tear and often means the car will last longer. Higher mileage can lower the value of the vehicle, as it may mean more repairs and maintenance.

• Market trends and depreciation. The current market conditions affect the value of the vehicle. Lenders take into account how similar cars are performing in the market and economic factors that affect demand. Depreciation is also a major factor, as cars lose value over time, though some models may retain more value than others.

• Modifications and features. Aftermarket modifications can either increase or decrease the value of the vehicle. While some upgrades like custom wheels or improved audio systems can enhance the car’s appeal, modifications that don’t align with the buyer’s preference may lower the resale value.

• Online resources. Borrowers can estimate their car’s value using online tools like Kelley Blue Book or NADA Guides, which provide preliminary values based on the vehicle’s make, model, year, and condition. However, these are just estimates and the lender will conduct their evaluation.

• Lender inspection. Ultimately, the lender will inspect the vehicle in person to assess its true condition. Based on the appraised value, the lender will offer a loan between 25 to 50% of the vehicle’s worth.

• Car title loans. Typical APR is up to 300%. Car title loans have extremely high interest rates, typically charging around 25% per month, which equates to an APR of approximately 300%. This steep rate is a result of the short-term nature of these loans, which are usually expected to be repaid within 15 to 30 days.

• Payday loans. Typical APR is often exceeding 400%. Payday loans are another high-risk borrowing option, with interest rates that can exceed 400% APR. While both payday loans and title loans are expensive, payday loans generally have even higher rates. The key difference is that payday loans are unsecured, while title loans are secured by your vehicle, which may slightly reduce the interest.

• Auto loans. The typical APR is 3% to 10%. Auto loans, which are typically used to purchase a vehicle, offer much lower interest rates compared to title loans. Interest rates for auto loans generally range from 3% to 10%, depending on factors like the borrower's credit score and market conditions. These rates are far more manageable for borrowers and come with longer repayment terms.

• Secured personal loans. The typical APR is up to 36%. Secured personal loans, which use various forms of collateral, generally have much lower interest rates than title loans. These loans are typically capped at around 36% APR, and their longer repayment terms make them easier to manage financially compared to the short-term, high-interest nature of title loans.

• Personal loans. Many lenders work with individuals who have bad credit. While personal loans for bad credit can have high interest rates, they are much more affordable than title loans and have longer repayment terms. Credit unions in particular can offer secured personal loans where you can use your car or another asset as collateral, often with better rates and terms.

• Credit cards. If you already have a credit card, you might consider using it to cover short-term expenses. While credit cards come with interest, their rates are typically much lower than those of title loans. Just be mindful of the terms and try to pay off the balance quickly to avoid accumulating high-interest charges.

• Family and friends. If you have a good relationship with family or friends, borrowing money from them could save you from taking out a high-cost loan. While this option can feel uncomfortable, it's often the least expensive, with no interest and fewer fees. Just make sure to have a clear repayment plan in place to avoid straining your relationship.

• Assistance programs. Many local governments and nonprofit organizations offer financial assistance for things like rent, utilities, medical bills, and other emergency expenses. These programs may provide immediate relief without the need to take on debt, and some even offer zero-interest loans or grants.

• Payroll advance. If you’re employed, your employer might be willing to provide a payroll advance allowing you to access part of your salary early. Services like EarnIn, MoneyLion, and Brigit offer payroll advances with minimal fees or interest. This can give you breathing room without the high cost of a title loan.

• Payday alternative loans. Offered by some credit unions, payday alternative loans are capped at 28% APR, which is much lower than title loans. These loans are available to credit union members and can be repaid over one to 12 months, making it a more manageable option compared to payday or title loans.

• Credit counseling. If your financial struggles are due to mounting debt, credit counseling might be an option. These services can help you consolidate debt, reduce interest rates, and work out a manageable repayment plan, potentially making your overall financial situation more stable.