Car Title Loan Requirements

A car title loan is a short-term loan in which the borrower's car is used as collateral against the debt. Borrowers are typically consumers who do not qualify for other financing options.

If you live in a state that permits car title loans, here's how getting one works. The borrower brings the vehicle and necessary paperwork to the lender. Although some title loan applications are available online, lenders still need to verify the condition of the vehicle—and the completeness of the paperwork—prior to releasing the funds. The lender keeps the title to the vehicle, places a lien on it, and gives the money to the borrower.

The loan limit is generally 25% to 50% of the car's cash value. The borrower repays the loan, plus fees and interest, within the time period allowed (usually 30 days) and reclaims the title, lien-free.

Documents You'll Need

In order to obtain a car title loan, also called a pink slip loan, in most cases a borrower must own the vehicle outright; there may be no liens against the title. Lenders also require certain paperwork, including any or all of the following:

• Original vehicle title showing sole ownership
• Government-issued identification matching the name on the title
• Utility bill or other proof of residency matching the name on the title
• Current vehicle registration
• Proof of vehicle insurance
• Recent pay stubs or other proof of ability to repay the loan
• Names, phone numbers, and addresses of at least two valid references
• Working copies of the vehicle's keys

Some lenders also require a GPS tracking device to be attached to the car, in case the borrower defaults and the lender wins the right to repossess the car. Some of these devices are designed to permit the lender to disable the car remotely.

You do not need good credit to get a title loan. In fact, most title-loan lenders won't check your credit at all, since the loan depends entirely on the resale value of the vehicle. Likewise, you do not need to be employed to qualify for a title loan.

Rates and Fees

Car title loans are considerably more expensive than traditional bank loans. Interest rates vary, but in states where the interest rate is not capped, it is generally set at 25% per month, or 300% annually. This means that a consumer who borrows $1,000 will need to repay $1,250 at the end of the 30 days to avoid going into default.

Most lenders charge a lien fee. In states where title lending is not regulated, some lenders also charge origination fees, document fees, key fees, processing fees, or other fees. The fees add up quickly, and can amount to an additional $25 (or more) on top of the loan and interest charges. Be sure to add up all the fees when figuring the total cost of the loan.

Example of a Title Loan

Say that Maria has recently lost their job and they are now struggling to make ends meet to make rent. As a short-term solution, they decide to borrow money using a car title loan against their vehicle, which has a current market value of $2,500. The loan provider agrees to extend them a car title loan for $1,250.

In the application process, Maria needs to provide proof of title (that they own the car) as well as additional documentation. The interest rate was advertised as being 20% for the 30-day duration of the loan, but Maria made the mistake of assuming that the interest rate was already annualized. The true annualized interest rate (APR) was actually 240%—far more than Maria would have accepted knowingly.

By the end of the one-month term, Maria was required to repay $1,500, significantly more than the roughly $1,270 that they were expecting. Given their desperate financial situation, Maria was unable to find the additional $230 and was therefore forced to forfeit the title to her car.

The Bottom Line

The best candidate for a car title loan is someone who owns a vehicle outright, understands the potentially high cost of the loan and has a reasonable expectation of having access to the cash to repay the loan before the repayment period expires. If there is no clear and realistic plan for paying off the loan, a car title loan can amount to selling the vehicle for half or less of its value.

Many title-loan borrowers renew their loans several times, making the financing much more expensive overall. So, again, the most critical consideration is ability to repay the loan on or before its due date.