Short answer: a car title loan is a short loan, usually 15 or 30 days, where you hand the lender your vehicle title. Monthly fees can be as high as 25%, about 300% APR (FTC). In a CFPB study of single-payment title loans, more than 80% of loans were reborrowed on the day the previous one was repaid, and one in five loan sequences ended with the borrower's vehicle repossessed (CFPB, 2016).
How a title loan works
- You give the lender the title to your car, truck or motorcycle. Usually you must own it outright (FTC).
- The loan is usually for 25% to 50% of the value of the vehicle, due in 15 or 30 days (FTC).
- You get the title back only after you repay the loan plus the finance charge and any fees.
- If you cannot pay, the lender can take the vehicle. See what can happen to collateral, including owing money after the sale.
What it costs on $1,000
The FTC example: borrow $1,000 for 30 days with a 25% monthly fee and you owe $1,250. Roll it over once and you pay another $250, so two months cost at least $500 (FTC). Following the same math:
| Times renewed before you repay | Fees paid | Total paid, including the $1,000 |
|---|---|---|
| None (repay after 1 month) | $250 | $1,250 |
| 1 (2 months) | $500 | $1,500 |
| 3 (4 months) | $1,000 | $2,000 |
| 6 (7 loans, 7 months) | $1,750 | $2,750 |
The table assumes each renewal is a fee-only payment on the same $1,000, as in the FTC example. Your contract may differ, but the pattern is the point: fees equal the amount borrowed after four months, and the debt has not gone down.
What the CFPB found
The CFPB studied nearly 3.5 million single-payment title loans made to over 400,000 borrowers in ten states from 2010 to 2013. The median loan was just under $700 and APRs were around 300% (CFPB report). Key findings (report, page 4):
- Over 80% of title loans were reborrowed on the very day a previous loan was repaid, and nearly 90% within 60 days.
- Only about one in eight loan sequences was a single loan repaid without reborrowing.
- More than a third of loan sequences were seven loans or more.
- About a third of loan sequences had a default, and one in five ended with the vehicle repossessed.
The CFPB summary of the study is in its May 2016 announcement.
Lower cost options to check first
The FTC lists alternatives to try before a title loan (FTC): ask your creditors for more time, look at a credit union or community bank loan, and contact a nonprofit credit counselor. One example:
| $1,000 for 6 months | Cost |
|---|---|
| Credit union payday alternative loan at the 28% APR cap, with the maximum $20 application fee | $180.54 a month, $103.24 in total cost |
| Title loan at 25% a month, renewed for the same 6 months (fees only) | $1,500 in fees, and the $1,000 is still owed |
A payday alternative loan needs credit union membership and has its own limits; see the PAL rules (NCUA). If you are active duty military or a dependent, read about the Military Lending Act first.
If you already have a title loan
- Find out the exact payoff amount and the date the loan is due. Paying more than the fee each time is the only way the balance goes down.
- Talk to the lender before the due date about a payment plan.
- Know what happens next: in many states a lender can repossess as soon as you default, without going to court (FTC).
- To complain about a lender, use the CFPB complaint portal or your state regulator.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.
Sources
- FTC: What To Know About Payday and Car Title Loans
- CFPB: Single-Payment Vehicle Title Lending (report, May 2016)
- CFPB: CFPB finds one-in-five auto title loan borrowers have vehicle seized for failing to repay debt (May 18, 2016)
- FTC: Vehicle Repossession
- MyCreditUnion.gov (NCUA): Payday Alternative Loans
- CFPB: Submit a complaint