How to Use a Car Title as Collateral for a Personal Loan

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The Federal Trade Commission doesn't mince words when it comes to car title loans, sometimes called pink slip, title pledge or title pawn loans. The FTC tells consumers to "put on the brakes" before agreeing to give up your vehicle's title as collateral. But if you've fallen on difficult times and can't get necessary cash in any other way, do some homework first so you can safeguard against problems later.

How Title Loans Work

Title loans are short-term arrangements, usually no more than 30 days. You hand over the title to your paid-off vehicle in exchange for cash. Some lenders give loans even when a car isn't quite paid off yet, as long as there's sufficient equity in the vehicle. The loan amount usually is no more than 50 percent of the car's value. When you pay off the loan, the lender gives you back your title. If you can't do this within 30 days, some lenders will let you roll the balance over into another 30-day loan, effectively creating a whole new loan along with additional interest and fees.

Applying for the Loan

In most cases, you won't have to endure a credit check or prove your income to get a title loan. However, you must complete an application, just as you would for a more conventional loan. Some lenders allow you to do this online. You'll eventually have to appear in person, however, so the lender typically provides you with the location of a nearby office. Take your vehicle and any required documentation. This usually includes photo ID, your vehicle title and proof of insurance. The lender might want to drive your car to make sure it's in sound condition and will probably photograph it. You may have to hand over a spare set of keys as well.

The Disadvantages of Title Loans

If this is all sounds pretty simple and like the answer to your prayers, pause and take a deep breath. Interest rates on these loans are typically very high -- an annual percentage rate in the three-digit range, significantly more than most credit cards and other loans. Extra fees usually are involved, such as for required roadside service plans, processing costs and administrative fees.

The most significant downside to a title loan is that if you default, the lender may repossess your vehicle. If it eventually sells your car for more than the loan amount, some states require that it return the difference to you, but this isn't true everywhere. You may have to agree to install a GPS or starter interrupt device on your car so the lender knows where it is and to prevent you from driving off to parts unknown if you default.

How to Protect Yourself

Under federal law, title loan lenders must give you a written contract, clearly stating what extra fees you're responsible for and the interest rate. The contract probably will state a monthly rate, not an APR, to avoid scaring you off, so do the math. If the monthly rate is 25 percent, this works out to an APR of about 300 percent. If you have an available credit card with some room on it, you might want to use that instead, or ask family or friends for assistance if you can't get a loan any other way. If you decide to go ahead, read the contract word for word and make sure you understand all its terms and implications. Ask the lender to explain anything that's unclear and try to get the explanation in writing.