How Does A Title Loan Work?

A title loan is a specific type of short term loan. Typically the loan amount is small and the time period for repayment is short. Investopedia cites a title loan as a good source of fast, short-term cash when your credit history may prevent you from being approved for other types of loans.

If you are considering taking out a title loan, this short post will explain what to expect and exactly how these types of loans work.

Applying for a Title Loan
In general, you must own your car in full or be very close to paying it off in order to qualify for a car title loan. Once you can meet these criteria, then according to, these are basic steps to apply for a title loan.

– Fill out the title loan application forms.
– Make sure to bring your car title as well as your photo ID.
– Drive to your appointment in the car that will serve as collateral for your loan.

What Does a Title Loan Cost You?
It might seem like giving the lender the title to your car would be enough, but actually you will also be assessed interest on the amount and period of the loan. Typically the interest rate can be higher than for other types of loans (up to 25 percent in interest).

Example: You take out a loan for $500. The term of the loan is 30 days. Your interest rate is 25 percent. You will pay back the $500 plus $125 in interest for a total of $1,250.

What if You Can’t Pay the Money Back?
If you find you are not able to pay back the full amount of what you borrowed in the time period allotted, you can ask the lender for what is called a “rollover.” In general, a rollover will give you an additional time period equal to the first (so, for instance, another 30 days) to repay the money.

This will add another interest-based fee on to the fee you already owe for the first 30 days. So here, you will now owe the $500 plus $125 in interest for the first 30 days plus another $125 for the second 30 days to equal a total of $750 you now owe the lender.

Can You Actually Lose Your Car?
The short answer to this question is “yes.” In this way, title loans function exactly like pawn shops. If you don’t pay, then the lender takes your collateral (in this case, your vehicle) as payment instead. So just be sure you are comfortable with the terms before taking out a title loan.