All loans involve risks if they are not repaid on time, but car title loans come with particularly troubling consequences. That means the lender could repossess your car.
Before applying for a title loan, understand the risks of borrowing money with your car as collateral. These are one of the more expensive types of loans with relatively strict repayment terms, making them an expensive option that should only be used as a last resort.
What is a car title loan?
With a car title loan, you can borrow 25% to 50% of the car’s value in exchange for giving the lender the title of the car as collateral.
Car title loans serve consumers who have had credit problems in the past and need cash quickly. Most lenders have little or no credit requirements. Some lenders do not check your creditworthiness. The application process is usually simple, and if approved, funds can be disbursed within business days.
How do title loans work?
A car title loan uses a vehicle as collateral, such as a car, motorcycle, boat, or recreational vehicle. Some loans are lump sum, meaning the borrower must pay the entire loan plus fees within a month or so. Installment loans can be repaid over three or six months, depending on the lender.
To explain how these loans work, let’s say you own a car worth $5,000, but you need $1,000. You will be charged a 25% finance charge. For a $1,000 loan, this equates to $250 in interest, even if the loan is paid off in just 30 days. This works out to an annual percentage rate (APR) of over 300%. For comparison, the average APR for personal loans in the first quarter of 2025 was 12.64%.
Some lenders charge loan fees, processing fees, and documentation fees, which make borrowing costs even higher. You may also be required to obtain and pay for a roadside assistance plan for your vehicle or have a tracking device installed.
What do I need to apply for a car title loan?
You can apply for a car title loan online or in person, but you’ll need to visit a physical location to show your car to a lender. Also, be prepared to provide the lender with:
The car remains in your possession for the duration of the repayment period, although the lender may require a set of keys or a tracking device installed.
Disadvantages of car title loans
Obtaining a title loan may be easy, but that convenience is coupled with significant costs and risks.
“If you don’t pay off your loan on time, it rolls over into another cycle with additional fees,” said Bruce McCrary, senior vice president of communications at the National Credit Counseling Foundation. “This creates a very difficult situation for people who are already struggling to make repayments. This is the very definition of a debt cycle.”
However, the biggest drawback is that you can lose your car. If you can’t repay the loan, the lender can repossess your car and sell it to get their money back.
To make matters worse, “some car title lenders have installed GPS devices called ‘kill switches’ that prevent borrowers from starting their cars and use this as a means to facilitate debt collection and vehicle seizure,” added Graciela Aponte Diaz, vice president of community engagement at the Julian Bond Financial Equity Institute (JBI).
Will a car title loan affect your credit?
In most cases, a title loan will not affect your credit. Car title lenders typically do not perform credit checks or report to credit bureaus. However, falling behind on your title loan can seriously impact your credit score.
Many title lenders charge high fees if you miss a payment. Missing one payment can significantly increase the amount you owe, and missing multiple payments can start a cycle of debt that’s difficult to escape.
The lender can repossess your car, but if your debt exceeds the value of your car, they can turn the remaining debt over to a collection agency. At that point, the debt will appear on your credit report.
Title loan alternatives
Despite the serious drawbacks, some consumers are not convinced that they can be approved elsewhere. In fact, a CFPB study found that 48% of people who borrow on paydays, pawns, or car titles avoid applying for other forms of credit. However, McCrary recommends reaching out to traditional banks and credit unions to identify lower-cost financing options.
Whether you don’t have a bank account, have a bad credit score, or have made poor financial decisions in the past, it’s worth considering all your alternatives.
“It’s interesting to see how flexible these traditional lenders can be,” McCrary said. “There are many credit unions that are willing to work with unbanked customers.”
personal loan
If you have a bad credit score, it may be difficult to qualify for a personal loan, but you may have options. Some online lenders feature bad credit loans that you may qualify for.
If you’re a member of a credit union, you can also try explaining your situation to a banker. Credit unions may make loans based on the strength of your relationships and banking history. Alternatively, you can increase your chances of approval by asking a friend or relative with a steady source of income and a good credit rating to cosign your application.
payday alternative loan
Payday replacement loans are also a low-cost option to consider. Although available through some credit unions, you must become a member to access this loan product. Loan amounts range from $200 to $2,000 and are paid over 1 to 12 months.
The application fee is capped at $20 and you pay less than 28% interest. This is lower than some bad credit personal loan rates. This makes payday replacement loans more affordable than most car title loans.
credit card
You can also use your credit card for financial emergencies. Alternatively, you can withdraw funds from your credit card through a cash advance.
Keep in mind that interest rates on cash advances are usually higher than the interest rate you pay on your purchase. Variable interest rates are up to 30%, compared to an average purchase annual percentage rate of 20.13% as of July 2025. Additionally, there is no grace period and interest starts accruing immediately. Expect to pay ATM fees to withdraw funds.
McCrary rarely advises against taking on more credit card debt, but says it’s a better option than a title loan because you’ll likely pay much less interest.
conclusion
Car title loans are a convenient option for getting cash quickly. Still, the costs are usually not worth the risks involved, and you could end up in a much worse situation than you were before you took out the loan. Before settling on a car title loan, consider more affordable alternatives such as credit cards, personal loans, and payday replacement loans. Check the installment interest rate and compare financial institutions before applying.
However, if you have exhausted all options and must use a car title loan, read the fine print. Title lenders must provide you with the loan terms in writing before you sign, and federal law requires them to be honest and upfront about the total loan amount. If you feel that the lender is not disclosing all the details, take your transaction elsewhere.