Title loans are high-interest, short-term loans that use your vehicle as collateral. Although many states do not allow this type of lending, if you live in a state that does and have little to no chance of getting a traditional loan, a title loan may be one of your few remaining options.
How much you can get for a title loan depends on your lender and the value of the vehicle. Most use either the Kelley Blue Book or NADA guidelines (see Resources) to determine a current fair market value, and then offer you a loan that is a percentage of this amount. The most common percentage, according to the Consumer Federation of America, is 50 to 55 percent of the fair market value. The average loan amount is $600 to $2,500, according to the Centers for Responsible Lending.
As of 2010, 15 states allow title loans with few to no restrictions. These include Alabama, Arizona, Delaware, Georgia, Idaho, Illinois, Louisiana, Mississippi, Missouri, Nevada, New Mexico, South Dakota, Tennessee, Utah and Virginia. An additional eight states -- Florida, Iowa, Kentucky, Minnesota, Montana, New Hampshire, Oregon, and Vermont -- allow title loans but limit the rate of interest a lender can charge. An additional four states -- California, Kansas, South Carolina, and Texas -- permit title loans only because of loopholes in existing legislation. In the remaining 21 states, title loans are not legal.
In order to get a title loan, you must have a clear title to your vehicle. Although lenders do not check your credit, you will need a pay stub as well as the title, personal identification and a second set of keys to the vehicle. After a representative appraises your car or truck and determines your ability to pay based on your pay stub, your will receive a loan offer. If you accept, you turn over the title and second set of keys, which the company holds until you pay the loan in full.
Because this is a short-term loan with full repayment required within about 30 days, it is wise to consider potential consequences before making a decision on a title loan. Most often, title loans have significantly higher interest rates than other types of loans with some going into triple digits, according to the National Association of Consumer Advocates. If you find you cannot pay in full after 30 days, you risk trapping yourself in continually having to renew the loan at an increasingly higher cost or alternatively, losing your vehicle via repossession.