A title loan is really a fairly simple concept. The borrower pledges their vehicle as collateral for a loan. This is not unlike when you purchase a used car.
The lender holds a security interest, in the form of a lien on the vehicle title, until the vehicle loan is paid in full.
The confusion around title loans comes from a number of different factors which we’ll try to explain further. These include:
- Every State is different – this makes it difficult to answer questions like “how does a title loan work” with any real detail that is consistent across states. Interest rate caps, loan term minimums and maximums, and fees all vary from state to state. Yet, there are plenty of single answers to this question published regularly.
- Lenders have different policies – this adds to the complexity of answering questions like “how much can I borrow with a title loan” since states have limits and lenders may have their own limits as well. Different lenders may also have different policies on the vehicles they will lend on, like older vehicles or motorcycles.
- Biased and incomplete information – whenever you look for an answer on a search engine to a question like “how do title loans work” you will often find quite a bit of content published by both title lenders and their competitors. They have very different views and this can cause confusion.
Every State is Different
Each state treats title loans differently. Some permit title loans with few restrictions. Others do not allow them at all. Some have single payment title loans. Others require title loans to have monthly installments.
Some states have limits on how much you can borrow, others do not. We could continue but the fact is title loans work very different in some states. This makes writing a general post on how title loans work, well, not very useful.
States have Different Terms for Title Loans
Some states have Title Pawns, Auto Equity Loans, Car Title Loans, etc. The name of the loan is not really important; how the loan works and what the loan agreement says is what is important.
Lenders have Different Policies
As mentioned, adding to some of the confusion relating to title loans is the fact that lenders have different policies. These can include items such as:
- Interest Rates – lenders do not all charge the same interest rates
- Fees – there are usually maximum fee amounts prescribed by the state, however not all lenders charge the same fees.
- Loan Amounts – lenders often have different minimum and maximum loan amounts.
- Vehicles – some lenders will only lend on late model cars, others will lend on any vehicle. Some provide motorcycle title loans, others do not.
As you can probably see by now a simple answer to any question about title loans becomes difficult unless you have both the state and the lender defined first.
Biased and Incomplete Information
Another factor adding to the confusion is the prevalence of biased and inaccurate information published regularly. As we mentioned, searching for “how do title loans work” results in a large number of articles published by mostly two groups:
- Title Lenders
- Competitors
What do we mean by title loan competitors? Simply take a look at the groups publishing title loan related articles and you’ll find many are credit card related.
The main ‘alternative’ to a title loan suggested in some of these articles is a credit card cash advance.
As soon as you understand that, it is no surprise that Experian and Credit Karma publish title loan related content often.
Is that a bad thing? Not necessarily, except, as noted, the information provided does not take into account the fact that title loans work very differently depending on state and lender.
Online Title Loans
Additionally, online title loans are becoming more available and prevalent. This can add yet another layer of complexity to figuring out how these loans work.
The same factors applying to online title loans as others; including state, lender, and information source. Some states permit online title loans, others do not.
Same day/24 Hour Title Loans
Time constraints often accompany the need for a title loan. One of the drawbacks of an online title loan, versus visiting a storefront, is the time to fund the loan.
While there certainly are 24 hour title loans and those funded the same day, again this depends on which state you live in and where you get the title loan.
Multiple Title Loans
What about getting a second or even third title loan? In the vast majority of cases this is not permissible. Even if it was, the costs may be a bit prohibitive. Find out if you can have two title loans.
Conclusion
Why are title loans confusing? The fact is that there is a lot of title loan related content being published, by several groups, and these attempt to address title loans as a whole without taking into account differences at the state and lender level.
This definitely makes it confusing. A recent Experian article provides an example of a 30 day title loan with an APR of over 400%.
This certainly doesn’t make a title loan seem very attractive. Yet, depending on which state you live in both the term of 30 days and the APR of 400% could very well be against state law. The article failed to mention this point.
Make sure to take into account the publisher of the information, and read multiple sources. To get a quote on a title loan it is usually best to go directly to the lender.