What is a Car Title Loan + 4 Things You Should Know Before Applying for One

2 hands of an elegant woman on car's steering wheel.

When sudden, unexpected things happen, leaving us strapped for cash, one of the most accessible solutions is to borrow money or take out a loan. However, in most cases, applying for loans and getting approved would require a good credit score. So what if you don’t have an excellent credit rating or have no credit scores? If you own a car, you have another option: a car title loan.

In this article, you will learn what a car title loan is, how it works, its pros and cons, and other things to consider and keep in mind.

What is a car title loan?

Car title loans or auto equity loans (sometimes called pink slip loans or car collateral loans) are short-term loans based on the value of your car. The borrower hands over the title of their vehicle, and the entity that lends the money will become the lien holder of your vehicle. So you get your cash and still get to drive your car, provided that you repay the total amount, along with the fees and interests, on time.

How does a car title loan work?

Some car title loans are single-payment types. Meaning you will repay the loan in full plus interest within a month or so. Some are installment loans wherein lenders can give you three to six months or up to a year to repay the loan. Car title loans are not limited to just cars. You can put up motorcycles, recreational vehicles, or boats as collateral.

You can either apply in person or online. However, you must visit a physical location to show your vehicle. In addition, you would need to provide a clear title, photo ID, proof of insurance, and in some cases, a set of keys to the vehicle. You will have your car for the loan duration unless you default on the car title loan.

Pros and Cons of a Car Title Loan

Now that you have the answer to the question, “what is a car title loan, and how does it work?” let’s weigh the benefits and drawbacks of a car title loan.


  • – No credit check. The loan is mainly based on your car’s ownership and current value, so most lenders don’t run credit checks. 
  • – Fast cash. If you and your vehicle qualify, you can get the funds as soon as the same day you submit your application.
  • – Continuous use of your car. You get to keep using your vehicle while you repay the loan as long as you don’t default on your payments.


  • – High-interest rates. The annual percentage rate is usually 300% or 25% per month. Add to that: processing, document, and origination fees. 
  • – Short repayment terms. You can’t expect to get a five-year payment plan with a car title loan. Terms usually last 30 days to 12 months, depending on the state. There are states, though, that allow multiple rollovers.
  • – Possibility of losing your vehicle. If you cannot repay the loan, the lender will repossess your car and sell it so they can recoup the money you owe.
  • – Car equity’s role in your qualification. You must have significant equity in your vehicle for you to be able to take out a loan against it. If the car hasn’t been paid off, you should have at least paid most of it.
  • – Possibility of paying more. In case of repossession, you might pay more if the amount they get from selling your car is insufficient to cover your debt.

4 Things you should know before applying for a car title loan

Before you go and get a car title loan, here are a few things you need to know.

Loan Value

Lenders will appraise your car, and they get to decide your car’s “value.” Often, you get 25 to 50% of your car’s value in the loan. Some lending entities will only lower the car value if the vehicle is fully paid or if any outstanding loans are taken out against the car. Some will even require insurance.

Interest Rates

Car title loans usually have an average APR of 300%. This means that if your loan spans a whole year, a car title loan would cost you three times what you borrowed in fees and interest alone. Though this type of loan typically only lasts a month, the high-interest rates would mean that most people could not afford to pay back what they owe in a month. So they choose to roll over their debt to the next month. Unfortunately, this typically means they are charged fees and interests on top of what the borrowers were already charged when they initially took out the loan.


Because you put your car up as collateral, the lending agency will be able to repossess your car should you fail to pay your loan back in full. If you default on your loan, lenders have the right to have your vehicle towed or even unlock your car and drive away with it, that is if you gave them a spare set of keys when you took out the loan.

Credit Score

Your credit score plays no role in whether you get a title loan or not. Because you put up your car as collateral, lending companies do not care if you have a bad credit score. They would just take your car and sell it to the highest bidder if you default on your loan. And since their appraisal of your vehicle is 50% of its actual value, they can make money off it quickly.

Final Thoughts

A car title loan is one of the easiest, quickest ways to get cash, making it very tempting to turn to your car to get you out of a tight financial situation. Even for some lenders, you can get a car loan approved within the day and hours. However, before you take out a title loan, make sure that you can pay it back within the allotted time, or you will risk losing your car or getting buried in debt from the interest and fees alone.

It helps to find a lender with loan structures that can make payments more manageable. Payment Financial’s expert lending team is ready to help you review your options and answer any questions. Contact us today!