Basics
A car title loan is a way for a consumer to borrow money against the title of his or her vehicle. When a car or truck is owned free and clear of any liens, the owner holds a title. Without the title, the person cannot sell the vehicle. There are auto title lenders, similar to and sometimes in the same building as payday lenders, that specialize in loaning money to consumers using their auto titles as collateral. When someone borrows money with a car title loan, they give up the title to their car, and thus full ownership, in exchange for the loan. However, the owner can still drive the vehicle as long as he keeps up with the loan payments.
Risks
Car title loans are considered risky and are illegal in many states. If someone borrows $1,000 on a $20,000 car, the lender still gets the car title and can come legally take the car if it is not paid. These kinds of transactions are considered forms of predatory lending, and senior citizens and single parents have become especially susceptible. Some lenders also charge in excess of 30 percent interest, with some even charging as high as 300 percent interest for short-term cash loans.
Alternatives
An alternative to a car title loan may be a regular payday loan, which still is controversial but does not put someone's car at risk. Some banks will also issue lines of credit or secured loans based on the vehicle as an asset, or place a lien against the vehicle title for the amount of the transaction only. Getting a car title loan is considered an emergency last resort and should be used carefully because of the risk of losing the vehicle entirely even for an unpaid small cash transaction.
Documents
If you do decide to get a car title loan, some documents are usually required. Having proof of income, proof of insurance, a driver's license, a phone or utility bill from your place of residence and, of course, the car title are typically needed for lenders to transact upon such loans.
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