Car title loans form one of the largest sources of unconventional credit in the United States. Americans take out roughly $1.6 billion of these loans each year, and lenders are all too willing to promote the speed and convenience. If you are considering one of these emergency loans, you must set aside the hype and understand the fine print.

How Do Title Loans Work?

A title loan company works like an automobile pawnshop. You tell the company basic details about yourself and your vehicle, and an employee tells you how much money you can get for it. Most legitimate title lenders want to see the car, truck, or SUV before they will finalize the loan amount. You can either drive the vehicle into a local shop or schedule an appraisal at a more convenient location.

Depending on where you live, your new automobile title loan must be for a minimum of $750 to $2,500. The maximum can be thousands more but is usually capped at half the vehicle’s resale value. As the owner, you pledge the vehicle as collateral for a short-term cash advance. The lender then places a lien on the title and sometimes holds the hard copy of the title until the loan has been repaid. If you pay back everything as agreed, the lien goes away and you get the title back. If you default, the lender takes your car and sells it to recoup the loan balance.

Who Gets a Cash Loan for a Car Title?

Car title loans are popular with people who have trouble qualifying for traditional bank loans or do not want to go through the hassle. Title lenders typically do not ask why the money is needed, so borrowers can use the extra cash for emergency expenses, rent payments, doctor bills, car repairs, college tuition or any other need. These loans help people to avoid late fees, overdrafts and bounced checks. With online car title loans, a borrower can have extra money sent to her checking account without visiting a neighborhood representative.

To qualify for auto title loans, you must own your vehicle outright or have only a little left to pay on it. You cannot get a title loan for a leased vehicle. You must also earn enough monthly income to pay back the principal plus interest and fees. Some title loan companies do check credit reports, but most still offer secured financing for customers with bad credit. You may be required to show proof of full coverage insurance until you pay off the loan.

How Much Does Short-Term Financing Cost?

Auto title loans come with high interest rates, so you should only use them for short-term financial help. The cost of borrowing can be much higher than with conventional bank loans, with interest rates ranging from 36 percent to 180 percent annually. As an example, if you borrowed $10,000 at 50 percent interest for one year, you would pay back $15,000 by the end of the loan term. If the APR increased to 100 percent, you would pay $20,000. The good news is that few lenders charge a prepayment penalty, so you can pay off the loan early and save some cash. Even though the average auto title loan is paid off within 10 months, most lenders calculate payments based on a full one-, two-, three- or four-year term.

Where Can I Find the Best Auto Loan Companies?

Predatory lending legislation has stopped auto title loan businesses from operating in certain states. From West Coast to East Coast, auto title loans are still legal in California, Nevada, Idaho, Utah, Arizona, New Mexico, Texas, South Dakota, Kansas, Missouri, Wisconsin, Illinois, Tennessee, Louisiana, Mississippi, Alabama, Georgia, South Carolina, Virginia and Delaware.

If you live in one of these states, you can speak with a local title loan shop or find a lending firm online. Some businesses advertise under the terms “pink slip loans” or “car equity Loans,” but the basics remain the same. Applications take less than fifteen minutes to complete.