What is a title loan and how does it work? | Personal finance

This is where title loans can become a headache. If you don’t repay your loan on time, you can lose your car because it serves as collateral. So if you choose to take out a title loan, be sure to pay on time so you don’t risk losing your asset.

How much you can borrow with a title loan

Your loan limit is between 25% and 50% of the car’s total value, and the lender will examine your car to determine its value. Some loans are as low as $100 while others are above $10,000 or more.

When should you get a title loan?

According to the Consumer Financial Protection Bureau (CFPB), 20% of car title borrowers have their car seized when they cannot repay their loan in full. Car title lenders derive the majority of their business from borrowers who continually take out new loans to cover old ones. More than half of car loans become long-term debt and more than four out of five car loans are reborrowed because borrowers cannot pay them off in one payment.

For this reason, you should look to alternative financing methods before taking out a title loan. Alternative payday loans from credit unions, personal loans from online lenders, credit cards, and even borrowing money from friends and family are all better options than potentially losing your vehicle.