What Is a Car Title Loan and How Do They Work?

If you desperately need cash, a car title loan may seem like a good option. You can get these short-term loans with bad credit, and lenders can get you cash quickly. But as convenient as they may sound, car title loans have big risks. A 2025 survey from the Center for Responsible Lending found that of those borrowers who had at least one late payment on a car title loan, more than 40% of them faced wage garnishment and repossession, or were being sued.

Due to these and other risk factors, you should consider a car title loan only as a last resort. Read on to find out about car title loans, their risks, and potential alternatives to explore.

What is a car title loan?

A car title loan, also called an auto title loan or a car title pawn loan, is a type of secured, short-term loan that could last between 30 days and several months, depending on your state. As the name suggests, this loan type uses your vehicle title as collateral. In addition to a car, you can secure these loans with a motorcycle, truck, or other vehicle. 

You can borrow around 25% to 50% of your vehicle’s value with a car title loan. You generally have to own your vehicle outright, but you may be eligible with some lenders if you’ve paid off most of your loan. 

A car title loan is a particularly risky way to borrow. Financing rates are extremely high, and if you can’t repay the loan, you could lose your car. In fact, these loans aren’t legal in all states. 

How do car title loans work?

When you take out an auto title loan, you give the lender possession of your vehicle title in exchange for a loan. The lender charges you finance fees, often up to 25% monthly, which can equate to an APR of around 300%. You may also be charged additional charges, like origination and processing fees, which drive the cost even higher. 

Getting a car title loan generally doesn’t involve a credit check. But lenders may require an inspection of the vehicle, and will need to see proof of insurance and a form of ID. 

When your loan term ends and you repay the loan, interest, and any additional fees, you get your title back from the lender. However, if you can’t repay the loan on time, the lender may allow you to roll it over — for an additional fee plus financing charges. 

Here’s how that might look:

• Say you take out a $1,000 car title loan that’s due in 30 days. The lender charges 25% per month plus a $50 origination fee. In total, you’d owe $300 plus the original $1,000 you borrowed — that translates to a 360% APR. 
• If you couldn’t repay the loan, the lender might let you roll it over for another 30 days, but tack on a $25 rollover fee to do so. 
• If you don’t repay the loan, the lender could repossess your vehicle. They can then sell it to recoup their losses, and in some cases, can keep all of the proceeds — regardless of how much you borrowed.

Why are car title loans risky?

Any type of borrowing involves some degree of risk, but car title loans are especially dicey. Here are a few of the biggest risk factors to be aware of when it comes to car title loans:

• You could lose your car: If you fall behind on payments, lenders can repossess your car and sell it. Unfortunately, this may be more common than you think: The Center for Responsible Lending’s survey found that more than 1 in 5 title loan borrowers who made late payments lost their car to repossession.  
• The cost of borrowing can be exorbitant: Car title loans may seem convenient, but they can be costly. Monthly finance fees can be as high as 25%, which equals an annual APR of about 300%. Plus, lenders may charge origination fees and application fees on top of financing charges. However, some states and lenders have lower fees and finance charges, and longer repayment periods. Carefully compare title loan lenders before choosing one.
• Lenders don’t issue loans based on your ability to repay: “What borrowers may not realize is that the loan amount is rarely tied to any actual ability to repay the debt,” says Josh Richner, Founder of Faithworks Financial. While this can be risky for the borrower, it may actually benefit the lender, who Richner says can “make more on the loan through a repossession and sale of the vehicle.” Richner suggests borrowers remember that just because a lender issues you a loan doesn’t mean you can afford it. 
• Loan rollovers can lead to a cycle of debt: The Center for Responsible Lending found that 64% of title loan borrowers couldn’t make all their payments on time — a risk that may be exacerbated by the short-term nature of some loans. Even if your lender allows you to roll over a car title loan, you’ll have to pay additional fees and interest on top of what you already owe, making it easy to get caught in a cycle of debt.

How to get a car title loan

A car title loan should be a last resort. But if it’s your only option, you can get one by taking the following steps:

1. Find a lender: “First, research any lender you intend to apply with for a car title loan,” suggests Austin Rulfs, Director of Zanda Wealth. “I have witnessed too many customers sign into agreements with hidden fees, high interest rates, and low control terms.” Carefully review loan processes, fees, rates, and, if available, customer reviews. You should be able to find options near you by searching for car title loans online. 
2. Apply online: Most lenders allow you to begin the application — if not complete it — online. You’ll have to provide information about your vehicle and auto insurance. 
3. Provide documentation and get a vehicle evaluation: Along with your application, the lender will likely need to see your car. They’ll also require you to hand over your car title and provide certain documentation, like proof of insurance, income, and a form of ID. You may even need to provide a second set of keys.
4. Review loan terms and sign: After you receive a loan offer, review the terms carefully before signing and receiving your funds. “Lenders with not-so-noble intentions make use of confusing contracts in order to make it easier on their part to repossess,” warns Rulfs. “Take an extra day to investigate and ask questions to prevent this problem.”
5. Repay the loan: Pay the loan back, plus any fees and interest, by the predetermined due date. Keep in mind a single late payment can have major consequences. Rulfs recalls an experience of a friend who took out a loan and made this mistake: “He lost the car he had because he forgot to make one payment of the loan, which was almost paid.” Once you’ve paid the loan back in full, you can get your title back.

Alternatives to auto title loans

Because auto title loans involve so much risk, consider these alternatives when you’re short on cash:

Apply for a personal loan 

Personal loans offer much larger sums of money and longer repayment terms than auto title loans. While these loans require a credit check, they can help you build credit if you make on-time payments. Additionally, these loans are often unsecured, meaning you don’t need to put up collateral to qualify for a loan.

Personal loans have much lower interest rates compared to title loans and offer consistent monthly payments. Plus, many lenders can fund your loan within a day of approval. If you have bad credit, look for a lender that offers personal loans for bad credit.

Take out a payday alternative loan

If you’re a member of a federal credit union, you may be able to take out a payday alternative loan (PAL) of up to $2,000. Depending on the type of PAL, you could have up to one year to repay the loan. Plus, the maximum interest rate is 28%. You must meet membership eligibility requirements to join a credit union and use its products and services. If you’re not yet a member, you may be eligible for a PAL immediately upon joining or have to wait one month. 

Borrow from family or friends

If other forms of borrowing aren’t available to you, borrowing from friends or family could be an option. A written agreement can help hold you accountable and outline a reasonable interest rate and repayment term. If you go this route, make sure both parties are clear on expectations upfront — failing to meet obligations could potentially lead to strained relationships. 

Negotiate with creditors

If you’re struggling to pay your bills, you can also try negotiating with your creditors or utility companies. You may be able to work out lower interest rates or extended payment plans that allow you to reduce your monthly expenses. 

Seek government assistance

If you’re struggling to cover basic necessities, you may be eligible for assistance buying food, paying utilities, and more. Check what’s available in your area by visiting 211.org.