If you’re still making car payments but need extra cash, you may be considering a title loan, among other options, to help you cover an emergency expense. But can you use your car for a title loan if it’s not paid off? The answer isn’t always straightforward since it depends on a few key factors, including the lender’s requirements.
In this article, we’ll break down what you need to know about using a vehicle with an existing loan for a title loan, discuss potential options, and highlight the pros and cons.
How does a title loan work?
So, what is a title loan? A title loan is a short-term loan that uses your car as collateral (something of value) to secure the loan. Lenders are prohibited from offering car title loans in some states.1 If you happen to live in a state that does, the lender may typically allow you to borrow anywhere from 25% to 50% of your vehicle’s value.2
Typically, you’ll repay your loan with interest over a period of 15 to 30 days.3 However, if you default on the loan, the lender has the right to repossess your vehicle to recoup their losses.
Eligibility requirements for title loans
Many lenders don’t perform a credit check, so you could get approved even if you don’t have the best credit score. While lenders will usually require you to own your car outright, you might be able to find some that accept borrowers who are still making payments on their car loans.
If you find a lender that will lend to you while you’re still making payments on your car, the process might be a bit more extensive as the lender will need to keep the lienholder’s title. The lienholder is the company or individual with rights to the car until the loan is repaid. If you go this route, you should be prepared to provide additional documentation.
Regardless of whether you have a car loan or a title that proves you own your vehicle, your car will need to pass an appraisal and inspection. You might also be asked to share the following information:
● Government-issued ID
● Proof of income (pay stubs, tax returns, and/or bank statements)
● Vehicle registration
● Proof of insurance
Pros and cons of title loans
Before you go ahead and take out a title loan, be sure to consider these benefits and drawbacks to make the best decision for your financial needs.
Pros
● Flexible requirements: Title loans may be easier to get approved for compared to other types of loans because they typically don’t require a credit check. Your eligibility is mainly based on the vehicle you’re offering as collateral.
● Quick funding: You won’t have to wait long for the funds. Many title loan lenders will give you the cash as soon as your vehicle passes the appraisal and inspection.
Cons
● Costly: Title loans are among the most expensive types of loans. They come with interest rates that can exceed 300% and can easily lead to a cycle of debt.4
● May lead to repossession: If you default on a title loan, the lender may repossess your vehicle. This can be problematic if you rely on your car to get to and from school or work or run daily errands.
A title loan should be a last resort
Even though a title loan may sound like a quick fix, it’s not cheap and could leave a negative impact on your finances down the road. If possible, you should consider alternate, more affordable financing solutions, such as a personal loan or borrowing from friends and family. Weigh your options carefully before making your final decision.
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