Car title loans and pawn loans: what you can lose

When money runs short, your car or a piece of jewelry can look like the fastest way to get some. This guide is for you if you were offered a loan against your car title or are thinking of pawning something: it explains how these loans work, what the CFPB and the FTC found, what you can lose, what rights you have if your car is taken and which cheaper alternatives exist.

Single-payment title loan borrowers whose vehicle is seized, according to the CFPB

1 in 5²

The APR of a title loan with fees of 25% a month, according to the FTC

About 300%¹

Of the car's value, what they usually lend

25% to 50%¹

How a car title loan works

According to the FTC, a title loan is a short-term loan, typically 15 or 30 days, that uses your car, truck, motorcycle or other vehicle as collateral. It is usually for 25% to 50% of the vehicle’s value. To get one, you give the lender your vehicle title, and you usually need to own the vehicle free and clear, though some lenders take the title if you have paid off most of your car loan. The lender wants to see the vehicle, a photo ID and proof of insurance, and many want a duplicate set of keys. You do not get the title back until you repay what you borrowed, plus the finance charge and other fees.¹

The CFPB’s tool for choosing financial products sums it up the same way: you borrow money for a short time and give up your car title until you repay. Some are repaid in installments and others all at once, and if you cannot pay, the lender can repossess your car and sell it.³

Until you pay in full, the title, which is the paper that proves the car is yours, stays with the lender.¹

What it costs

The FTC says these loans are expensive. They often have monthly finance fees of up to 25%, which translates to an APRannual percentage rate (APR)The annual percentage rate (APR) is a broader measure of the cost of borrowing money than the interest rate. Besides the interest, it includes certain loan charges, such as discount points and some lender fees, spread over the life of the loan and expressed as a yearly percentage. That is why the APR is almost always a little higher than the interest rate. It is useful for comparing offers: if two loans have the same interest rate but a different APR, the one with the higher APR charges more in fees.See the full definitionClose of about 300%. Lenders often add other charges, such as processing, document and origination fees, and you may have to buy add-ons, such as a roadside service plan.¹

Example with real numbers

The FTC's example

A $1,000 loan for 30 days with a 25% finance fee.

What you borrow

$1,000

The finance fee

$250

What you owe at 30 days

$1,250, plus other fees

If you roll it over another 30 days

$1,500, plus rollover fees

What it costs to borrow $1,000 for 60 days

At least $500

That is the FTC's math.¹ Try the family budget to see what you could pay each month.

Run it with your numbersFamily budget

The CFPB studied nearly 3.5 million single-payment title loans. It found the typical loan is about $700 with a typical APR of about 300%, and that more than four in five are renewed the day they are due, because borrowers cannot repay them all at once. Only in about 12% of cases is everything repaid in one payment without quickly borrowing again. In more than half of cases borrowers take out four or more loans in a row, and more than two-thirds of the business comes from people who take out seven or more.²

What you can lose: your car

The FTC is clear: you could lose your vehicle. If you cannot repay, the lender may repossess it even if you have been making partial payments. Some require installing a GPS and a starter interrupt device, to find the vehicle and disable the ignition remotely. Once they repossess it, they can sell it, and in some states the lender can keep all the money from the sale, even if it is more than you owe.¹

The CFPB found that one in five single-payment title loan borrowers has their car or truck seized for failing to repay. And it warns that losing the vehicle can cost people their way to get to work or the doctor.²

Title loan, pawn loan and a PAL

The lender keeps your title

Title loan

• Typically 15 or 30 days, for 25% to 50% of the car's value.¹
• Up to 25% a month, an APR of about 300%.¹
• If you do not pay, they can take the car and sell it.¹

The shop keeps your item

Pawn loan

• They lend you much less than the item is worth.³
• Every fee, such as storage, belongs in the APR.⁵
• If you do not repay as agreed, the shop can sell it.³

Federal credit union

Credit union PAL

• From $200 up to $2,000, for one to 12 months.⁷
• Repaid in installments and never rolled over.⁷
• The FTC says it is much less expensive than a title loan.¹

Before handing over your car title, ask a federal credit union about a PAL.¹

Pawn shops

With a pawn loan, according to the CFPB, you are paid cash in exchange for an item the pawn shop keeps during the loan, such as jewelry or electronics. The loan is often much less than the item’s actual value, and if you do not repay as agreed, the shop can sell the item to cover the debt.³

A CFPB research brief explains that payday, title and pawn loans are called alternative financial services because the typical lender is not a bank. They are generally for less than $1,000, with high rates and terms of a month or less, and pawn loans usually use a valuable item, such as a computer or jewelry, as collateral. In the CFPB’s survey, 73% of people who had taken out a pawn loan in the previous six months still owed money, and 83% for title loans: many people roll them over or borrow again.⁴

Watch for the fees you do not see. In a lawsuit against a pawnbroker, the CFPB explained that every fee on the loan, whatever it is called, is a finance charge that must be included in calculating the APR. In its example, a $200 loan due in a month with a $10 finance charge, a $10 storage fee and a $20 processing fee totals $40 and yields an APR of 240%, although the shop showed only 120%. The CFPB noted that its complaint is not a finding that the law was violated. And in another action against pawnbrokers it said those fees are called, for instance, “appraisal,” “interest,” “storage” or “setup” charges.⁵ Add them all up before you sign.

If your car is taken

The CFPB explains the rights that commonly exist when a lender repossesses a car. Many depend on your state’s law:⁶

• Notice. In many states, the lender can repossess the car without warning or a court order after a missed payment; other states require notice first.
• No “breaching the peace.” Under some state laws, it cannot take the car with threats or physical force, by removing it from a closed garage without permission or by continuing after you refused.
• Your belongings. If you left things in the car, contact the lender right away to get them, and write down what was there and what it is worth.
• Catching up. In some states you have the right to pay what is overdue plus costs to get the car back.
• Before the sale. You have the right to be notified before it is sold; for a public sale, of the date, time and place. You may be able to buy it back by paying the full loan plus costs before the sale.
• After the sale. The lender must sell it in a commercially reasonable manner. If it sells for less than you owe, you may owe the difference; if it sells for more, you may be entitled to the surplus.

Be careful with that last point on a title loan: the FTC warns that in some states the lender can keep all the money from the sale, even if it is more than you owe.¹ That is why your state’s law matters so much. The CFPB suggests asking your state attorney general or consumer protection office, or your local legal services office.⁶ You find free legal aid by address on the Legal Services Corporation website.⁹

If a debt remains after the sale and it goes to a collection agency, the guide on debt collection explains your rights.

Cheaper alternatives

The FTC lists options that are less expensive and less risky than title loans:¹

• Ask your creditors for more time, and ask whether they will charge you for the extension.
• A credit union. Credit unionscredit unionA credit union is a not-for-profit financial institution that, like a bank, accepts deposits, makes loans and offers other services, but is owned by its members. Members elect a volunteer board of directors, and profits go back to them as lower fees, higher savings rates and lower loan rates. To join you need a common bond, such as your employer, your family, where you live or a group you belong to. It is chartered by the NCUA, a federal agency, or by a state. If the credit union is federally insured, your deposits are protected by the NCUA's insurance fund.See the full definitionClose typically have lower rates, and some federal credit unions offer a payday alternative loanpayday alternative loan (PAL)A payday alternative loan (PAL) is a small loan that federal credit unions can offer their members instead of a payday loan, which costs much more. According to the NCUA, the federal rule limits the amount and the term, which is short; the application fee may only cover the real cost of processing it, and there is a cap on how many you can have in a period. It is paid off in full in installments and cannot be rolled over. For one type of PAL, you must be a member for some time before applying. Some lenders that are not credit unions use the name, so read the fine print.See the full definitionClose (PAL), which is much less expensive. Some state-chartered credit unions have similar loans.
• A local bank, which can offer smaller loans with easier repayment, or a large bank that offers small loans to customers with low or no credit scores.
• Your tax refund, if you expect one: file as soon as you can.
• Credit counseling, free or low cost, from a nonprofit group, your employer, your credit union or your housing authority.
• Family, friends, charities and places of worship, which often help at no cost.

Under NCUA rules, a federal credit union PAL runs from $200 to $1,000 for one to six months (PAL I) or up to $2,000 for one to 12 months (PAL II), is never rolled over, is repaid in full in installments and carries an application fee that never exceeds $20.⁷ The guide on payday loans and their alternatives explains all the rules, and the one on credit unions vs. banks explains how to join.

If you are on active military duty or a dependent of someone who is, the Military Lending Act covers vehicle title loans: you cannot be charged more than a 36% Military Annual Percentage Rate (MAPR), which includes fees and add-ons, or be required to accept mandatory arbitration, and your legal assistance (JAG) office can help.⁸

Before you hand over your car title

1. 1. Write down how much you need and by when

   Today

   Ask your creditor first whether it will give you more time.¹

   Try it with your numbersFamily budget

2. 2. Ask a federal credit union about a PAL

   This week

   From $200 up to $2,000, in installments, with an application fee of $20 at most.⁷

3. 3. If you still consider it, get every fee in writing

   Before you sign

   The APR, processing fees and add-ons such as roadside service.¹

4. 4. Ask what happens if you do not pay on time

   Before you sign

   Whether they can take the car and what happens to the sale money in your state.¹

5. 5. Keep copies of everything

   The day you sign

   If the car is ever taken, you have rights that depend on your state.⁶

If this is your situation

You need the car to work

The CFPB warns that losing the vehicle can cost you your way to work or the doctor;² look first for an alternative that does not use your title.¹

You have no credit history

Some large banks offer small loans to customers with low or no credit scores.¹

You are on active military duty

The Military Lending Act caps title loans at a 36% MAPR.⁸

You are going to pawn a family piece of jewelry

They will lend you much less than it is worth, and if you do not repay as agreed, the shop can sell it.³

Costly mistakes

• Mistake: Rolling over the title loan every month.

  Instead: Each rollover adds another fee; in the FTC's example, two months cost at least $500 on $1,000.¹

• Mistake: Thinking partial payments protect your car.

  Instead: The FTC says it can be repossessed even after partial payments.¹

• Mistake: Accepting add-ons without asking what they add up to.

  Instead: Processing and document fees and add-ons raise the cost of the loan.¹

• Mistake: Looking only at the 'interest' at the pawn shop.

  Instead: Add up every fee: storage and processing belong in the APR too.⁵

• Mistake: Leaving your things in the car and not claiming them.

  Instead: Contact the lender right away to get them, and write down what was there.⁶

• Mistake: Not asking about your rights when the car is sold.

  Instead: Ask your state attorney general or legal services: you may have a right to notice, to buy it back or to the surplus.⁶

What to do this week

1. Before handing over a title or an item, write down how much you need and ask your creditor for more time.¹
2. Ask a federal credit union in your area about a PAL.⁷
3. If you already have a title loan, gather the agreement and add up every fee.¹
4. Look up the number for your state attorney general or consumer protection office, in case you need it.⁶
5. Start an emergency fund, even a small one, and organize your debts with the credit plan.