Money Smarts Blog

The 411 on Title Loans

Oct 18, 2019 | Evelin Martinez

Man signing paper

What’s a title loan?

A title loan is the term used for a secured loan in which the borrower or borrowers pledge the title of an asset as collateral. In layman’s terms: you (the borrower) get a sum of money (loan) from a lender that you agree to pay back over an agreed upon period. In exchange, you promise an asset (your home, vehicle, motorcycle or boat, for example) to the lender if you don’t pay the loan back according to the terms.

Once the borrower and the lender agree upon a contract, the lender then puts their lien on the title. (A lien gives the lender the right to the asset (aka collateral) if the borrower does not pay back the loan according to the contract. This also means you can’t sell, give away or refinance the asset.) When the loan comes to its maturity date and final payment has been completed, the lender removes lien, and the title is given back to its owner (you).

If you find you can no longer afford your monthly payments, you can surrender the asset. But I recommend you give the lender a call and talk through your options – refinancing may make it easier to make payments and allow you to keep the asset.

Fair warning

Now that you get the gist of a what a title loan is, I must warn you there are some finance companies that make the loan seem affordable by allowing you to pay the loan back over a longer period but charging a much higher interest rate. The longer the term, the lower your payment but you may not realize you’re paying more in interest than you are for the actual loan. Check out our "How long will it to take to pay off a credit card?" calculator to give you an idea of how much you will be paying in interest based off your rate and loan amount.

Now, let's talk perks...

Some perks of a title loan

Lower interest rate
One of the biggest benefits of a title loan is the lower interest rate. Since your loan is backed by collateral, the lender is likely to give you a lower rate. Unlike title loans, credit cards carry a hefty interest rate.

If you’re dealing with credit card debt, then you could benefit from consolidating all your unsecured debt with a secured loan. In many cases, a lower rate means a lower monthly payment. Financial freedom is on the horizon!

You can still use the asset
One of the most common assets people pledge are the titles to their vehicles. But this doesn’t mean you’re walking to work. You still have full access to your car; you just can’t sell or refinance it. Just make sure you’re extra careful on the road – this isn’t anything new though, right? Safety first, always.

Improve your credit score
Secured debt looks much better on your credit report than unsecured debt – it shows you have something of value.

Before heading to a company focused on title loans, call or visit your local credit union or bank. Chances are they can find a solution to get you the money you need without hurting your financial future.

Pro tip: before jumping into any loan, check out the lender on the Better Business Bureau website.

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