Consumers use car title loans as a quick fix for cash-flow problems. However, they risk pushing themselves deeper into debt, especially if they deal with a title lender who gives loans to people who haven't paid off their vehicles. Furthermore, borrowers use their cars to get loans that typically don't come close to matching the value of their vehicles, so they risk taking a loss if they default on the loan.
People who get title loans use their cars as collateral in exchange for a loan. Therefore, title lenders usually won't give loans to people who haven't paid off their cars -- partly because the original auto lenders hold titles for vehicles until borrowers pay off their loans. However, some title lenders make exceptions and approve loans, even if borrowers still owe money on their vehicles. For example, some title lenders approve loans if they determine that a borrower owes less than 25 percent of the value of the vehicle he wants to use as collateral.
Title lenders give borrowers loans based on what they determine their cars are worth. Lenders then hold the car titles until borrowers repay their loans with interest. Customers usually have 30 days to repay, and they often can extend their loans if they need more time. Nevertheless, borrowers also are deeper in debt if they haven’t paid off the vehicle with the original auto lender.
According to a Bankrate.com article titled "Car Title Lending: Short-Term Fix with Long-Term Expense," people usually get title loans in amounts that are much less than what their vehicles are worth. The article says lenders usually don't provide loans that exceed 33 percent of a vehicle's value. Therefore, a person who turns over a title to a vehicle that's worth $10,000 may only get a loan for $3,300 at the most. The Bankrate article calls the loans a win-win deal for the lenders because they earn interest on the loans and hold titles to vehicles that are worth much more than the loans.
Borrowers who get title loans without paying off their cars ultimately may add a triple-digit loan rate to the rate they're already paying on the original car loan. The Bankrate article says title loans usually have interest rates of about 25 percent for a 30-day loan. Borrowers who extend their loans for an additional 30 days get the same interest rate. According to the article, that works out to a 300 percent annual interest rate, and a $500 loan for 30 days costs the borrower $625.