What is a car title loan?

A car title loan lets you borrow money even if you have a low credit score, because you use your car or vehicle as security for the loan. When you apply for car title loans you pledge your car as collateral, and if you can’t pay back the loan, the lender can legally seize your car. For example, car title loans in Toronto are sometimes called vehicle collateral loans and can apply to other types of vehicles beyond your regular car, including motorcycles, boats, and recreational vehicles.

How do car title loans work?

Car title loans work by letting you borrow against your car, so you’ll need equity in your car to fund the loan. This means if you financed your car when you purchased it, you’d need to owe less on the car than it is currently worth, or you need to have paid off your car loan completely. Most car title loans are for small amounts, ranging from $100 to $5,500, so you must have at least that much equity in your car to qualify.

When you get a car title loan, most lenders will deposit the cash directly into your account, or provide you with a cheque. Then you begin making payments. During that time, you can still use your car as you normally would, but if you stop making your payments, your lender can seize your car and sell it to pay off the balance of the loan. Your lender will place a lien on your vehicle when you take out your car title loan, so it is legal for them to take your car for non-payment.

Interest rates

The interest rates on car title loans in Ontario, for example, can be as high as 60% annually. This high interest rate can make repaying the loan very difficult, so it’s important to have a plan in place to pay the loan back before you sign on the dotted line.

Total cost to borrow

Beyond the interest rate, many lenders will charge fees to administer the loan. Some fees include:

  • Vehicle evaluation fees
  • Lien registration fees
  • Title search fees
  • Accident search fees
  • Administration fees

Losing your car

Some car title loans require a lump sum payment at the end of the loan term. If you can’t pay off the loan at the end of the term, you may be able to roll over the debt into a new term, but this will incur extra fees. If you miss your payments or default on your loan, your lender will seize your car and sell it to recoup the cost of the loan. If the car sells for more than the amount left on your loan, you will receive the profits of the sale. There are fees associated with this process. In some provinces, if the car sells for less than the remaining loan balance, you will have to pay the lender the difference.

How to get approved for a car title loan

Lenders of car title loans might be different than lenders of other more commonly known types of loans. For example, car title loans in Toronto are not available from banks or credit unions. Instead, you’ll find vehicle title loans at storefront cash stores and online. You can shop for a car title loan online with Loans Canada, and then fill out a short form about your financial background. After a quick credit check, you’ll be offered options for car title loans in your province that you can apply for right away.

Since you’re using your car as collateral for the loan, you can get approved for a car title loan even if you have a low credit score or a low income. When you apply for a car title loan you’ll need the following information:

  • Proof of ownership
  • Proof that the car is paid off
  • Proof of insurance
  • Your driver’s license
  • A valid car inspection
  • Proof of permanent residency
  • A bank statement

You may have to agree to have your car equipped with a GPS and/or a car immobilizer. This tool helps the lender keep tabs on the vehicle at all times. They may charge you a fee to install these devices.

Pros and cons of car title loans

Pros Cons
Access to much-needed cash if you don’t qualify for other loan options If you can’t make your payments, your vehicle will be seized
Approval is fast The interest rate is as high as 60% per year
A low credit score or low income is not important if you have equity in your car You might not be able to pay off the loan early
You have to pay many fees for loan approval
Your car may be outfitted with a GPS or car immobilizer

Alternatives to car title loans

Though a car title loan might be tempting when you’re in a financial tight spot, there are other solutions that could be more financially prudent. Before taking out a car title loan, we encourage you to consider a few other ways to borrow money:

Balance transfer credit cards

If you need money to pay off debt, a better option might be to apply for a 0% balance transfer credit card. A balance transfer credit card lets you transfer credit card debt from a high-interest credit card to one offering a low-interest rate for a promotional period, usually 6-10 months. Balance transfer credit cards are a good way to reduce your interest rate so you can focus all your financial energy toward paying off debt, without worrying about accruing more debt during the card’s promotional period.

Personal loans

personal loan can be a good way to access some much-needed cash at a reasonable interest rate. Personal loans can be unsecured, meaning they don’t require collateral, and the interest rate will likely be lower than what is available via a car title loan.

Extra income

If you need extra money, earning extra income through a second job or freelancing is a good way to avoid or get out of debt. While working more than 40 hours per week isn’t a pleasant experience, it’s preferable to paying the high interest rates associated with vehicle title loans.

Cutting costs

Creating a better budget and cutting some unnecessary costs will help free up extra cash and get you through your rough patch. Frugal living isn’t fun, but neither is paying back the thousands of dollars in interest charges associated with vehicle title loans.

Downgrading your car

If you’re in a financial jam, remember that your car is an asset that you can sell for money. If you have equity in your car, consider selling it and downgrading to an entry-level vehicle, or forgoing a vehicle altogether and taking public transit. The proceeds of the sale could help you restart your financial life, without incurring additional debt.

Final word

Taking out a car title loan is an expensive solution, but sometimes it’s necessary if you need quick debt relief. Make sure you consider all other options before resorting to a car title loan, and if you do take one out, make sure you have a solid plan in place to make your repayments so that you avoid the risk of having your car seized

Jordann Brown is a freelance personal finance writer whose areas of expertise include debt management, homeownership and budgeting. She is based in Halifax and has written for publications including The Globe and Mail, Toronto Star, and CBC.


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