What is a Car Title Loan?

A car title loan is a short-term loan where a borrower uses the title of his or her car as collateral for the loan.

How Does a Car Title Loan Work?

Loans for car title loans are usually for less than 30 days and change a high rate of interest. Borrowers offer the title of their car as collateral for the short-term loan. If the borrower is unable to pay off the loan, then the lender will take possession of the car and sell it in order to gain back the loan amount.

Car title loans are generally used by people with low income or poor credit scores who need cash for temporary crises. Car title loans are regulated so that they have a $4,000 limit.

Why Does a Car Title Loan Matter?

Lenders who offer car title loans are often referred to as predatory lenders because they prey on people who do not qualify for credit card accounts or bank loans. Since the loans on a short-term basis, the interest rates on the loan are normally stated as the monthly rate instead of the annual rate. In reality, the annual effective interest rates for car title loans are 12 times higher than the stated monthly rate.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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