What is a Car Title Loan?

September 23, 2011

A car title loan is a loan that allows you to borrow money based on the equity in your vehicle. When you own a vehicle, whether it is a car, a motorcycle or some other type of vehicle, that vehicle is an asset. It is not a liquid asset, however, since you can’t easily take the money out of the car that you paid in order to buy it. A car title loan allows you to use the equity you have built up in the car in order to borrow the money you need to deal with a financial emergency or a pressing need for cash.

How Does a Car Title Loan Work?

A car title loan is offered by special lenders who lend you the money in exchange for holding on to the title of your vehicle. You do not have to give up your car when you take a car title loan. Instead, you simply go to the lender and bring the title of your car with you. After the lender verifies some basic information, including that the car has value, that there is no one else who has an interest in the vehicle (like another lender) and that you have the income to repay a loan, the lender will approve you to borrow a certain amount of money. The amount of money that you can borrow is directly based on how much the vehicle is worth. You credit score is not a factor and often your credit is not even checked when you take a car title loan.

You can be approved for your car title loan in just a few hours in most cases, allowing you to quickly access needed funds to deal with unexpected financial situations or cash shortfalls. You can then negotiate an arrangement with the car title lender to repay the money in a way that makes sense based on your financial situation. For instance, you might make weekly or bi-weekly payments or you might pay on a monthly basis.

The car title loan may be written for a short period of time or a longer period of up to 5 years to keep the required payments lower.  But either way, they are typically paid off in less than a year, because there is no prepayment penalty for paying ahead of schedule and borrowers are well-advised to pay ahead of schedule as much as possible, to keep the amount of interest paid as low as possible.