What is a title loan? The simple and short answer is a way to borrow money using your vehicle. There is obviously a bit more to the answer than that, we’ll cover the details on this page.
Vehicle Equity
Title loans allow you to borrow money using the equity in your vehicle as collateral. What is vehicle equity? Vehicle equity is the fair market value of your vehicle minus whatever you currently owe on the vehicle.
Because title loans, or at least most title loans, require a lien free title, the equity is equal to the vehicle value. This means is your vehicle is worth $10,000 then you have $10,000 of equity in that vehicle.
Title loans allow you to use this equity as security for a loan. This makes them secured loans. If you default on a secured loan the lender can take possession of the collateral, in this case the vehicle. This can mean repossession and is a risk with a title loan.
Title Loan Amounts
Don’t confuse vehicle equity with home equity. Homes, and real estate in general, appreciates (increases in value) over time. Cars, on the other hand, depreciate (or lose value) over time. There are some exceptions like collector and classic cars.
In general cars depreciate. Most title loans are limited to 50% of the vehicle value.
Repayment Time Frames (Title Loan Types)
Title loan repayment times can range from 30 days to several years. The time frame for repayment depends on the state where you get the loan. Some states have single payment 30 day loans. Other states have loans with monthly installments that can last several years.
One thing to remember is the longer the loan, the higher the total loan cost. Interest accrues daily, so lengthening the loan will increase the total loan cost. Try to pay the loan as quickly as possible to avoid unnecessary interest charges.
Single Payment Loans
The first type of title loan, also called a title pawn, is a loan with one payment. The one payment is due, in full, at the end of the loan term.
The most common loan term is 30 days. This means you must repay the full amount, plus interest and fees, on the due date.
Monthly Installment Title Loans
The second type of title loan is one with monthly installments. A payment amount is due each month for the loan duration. A portion of each payment is applied to accrued interest and the remaining to the principal balance.
This generally makes these loans easier to repay, since each month the principal owed is being reduced.
These loans need to be entered into carefully and the loan agreement scrutinized. Making a high interest loan, like a title loan, amortized for several years can result in excessive interest charges.
In extreme cases it can cost 5, 6, and even more times the original principal to repay. This means it can cost $5,000 or more to borrow $1,000 if the rate is too high and the loan extended for too long.
Online Title Loans
Title loans online are more widely available now than even just a year or two ago. It is now possible to get a title loan 100% online without visiting a store.
This means it is no longer necessary to focus on finding a title loan near you, rather finding the best title loan available to you.
Additional Information
Now that we’ve answered the question “what is a title loan”, there are other related topics including:
Title Loan Process – how title loans work
Title Loan Requirements – what you need to get a title loan
Preparation for Online Title Loans – how to make sure your online title loan goes quickly