Helen Burnett-Nichols
Beth Buczynski
A title loan is a way to turn the value of your vehicle into cash that can be used for other expenses.
Before taking on a car title loan, it’s important to understand how these loans work, their advantages and disadvantages and what happens if you stop making payments.
How do car title loans work?
A title loan uses a vehicle you own as collateral — whether a car, boat, motorcycle or recreational vehicle — to secure a cash loan from a lender. Title loans must be paid back over an agreed-upon period, which is usually no longer than a couple of years.
Title loans are issued by alternative lenders, either in-person or online, rather than credit unions or Canada’s Big Six banks.
Title loan eligibility requirements
Generally, to be eligible for a car title loan, you have to own your vehicle outright and it must be fully insured. Your car acts as security for the loan, meaning that if you can’t pay back the loan, the lender can make a legal claim against that asset, and take it from you.
To apply for a car title loan, you must:
- Be over 18 years of age.
- Be a Canadian citizen or permanent resident.
- Have a valid driver’s licence.
- Provide the lender with proof of ownership, registration and insurance.
In some cases, title loan lenders may also require proof of employment and may conduct an inspection of the vehicle.
The lender is required to set out the amount, payment terms and timeline for the loan, as well as the total cost, including interest, fees and annual percentage rate. Car title loans are high-interest loans, as their APRs generally top 30%. This can make them much more expensive than other methods of borrowing money.
Once the loan is approved, the title loan lender will register a lien on the vehicle for the duration of the loan — usually ranging from a few months to three years. Loan funds will typically be deposited into your account directly or sent via e-transfer.
You will still be able to drive the car while the title loan is in place, but the lender may place a GPS tracker or immobilizing device on the vehicle.
How much money can you get with a car title loan?
The amount of your title loan ultimately depends on the value of your car, with lenders considering factors like the make, model, odometer reading and age of the vehicle to assess its worth.
Typically, car title loans are only offered on vehicles that are less than eight years old, for a maximum of 50% of the car’s value.
Pros and cons of car title loans
While they may be appropriate for some Canadians in select situations, car title loans can be an expensive and risky way to borrow money. If you need to use a car title loan, it can help to be aware of the pros and cons before applying:
Pros
- Fast approval: Car title loans are generally approved within days of applying — in some cases, within hours.
- Low credit scores accepted: Many car title loan providers will accept low credit scores, and some do not require a credit check in order to qualify. This may interest borrowers who do not qualify for an personal loan or line of credit.
Cons
- High interest rates: Car title loans charge significant interest rates, often between 30-60% APR. This is higher than most credit cards in Canada, which tend to charge around 20% APR. In Canada, lenders aren’t permitted to charge more than 60% interest annually, including fees.
- Extra fees: Some car title lenders may levy additional charges such as a vehicle evaluation fee, an administration fee or a registration fee, increasing the total cost of the loan.
- Risk of repossession: If you fail to make on-time payments or stop paying on your car title loan altogether, the lender has the right to repossess your vehicle as a result of the lien.
Car title loan alternatives
Before taking on a high-interest title loans, it is worth exploring options that offer lower fees or interest rates, to see if they can meet your needs, including:
Unsecured personal loan: Depending on your credit score and financial situation, you may be eligible to apply for an unsecured personal loan or line of credit. An unsecured loan doesn’t require collateral and may have variable interest rate that move in conjunction with the bank’s prime lending rate —typically lower than credit card interest rates.
Increasing credit card limit: Depending on the amount of money you need, your credit card may provide a cheaper alternative to a car title loan. If you have a history of paying your bills on time, speak to your credit card provider about the possibility of increasing your card limit.
Other secured loan (pawn loan): While still considered high-cost credit, pawn loans also have short terms and rarely require a credit check. Exchanging an item other than a vehicle (such as electronics or jewelry) for a short-term loan may be an alternative solution. Unlike with a car title loan, failure to repay a pawn loan will not hurt your credit score.
Cash advance: If you need a small amount of money quickly, a cash advance from your credit card company or a payday lender may be an option. Both cash advance options involve high interest rates and possible fees, however, if you anticipate being able to pay the money back in a matter of days or weeks, they help you bridge the gap.
Frequently asked questions about car title loans
Whether or not a car title loan is reported to credit bureaus depends on the lender, but it isn’t typical. However, if you fail to repay the loan and your car is seized by the lender, it will appear on your credit report and have a negative impact on your credit score.
In some cases, a lender will consider issuing a title loan when a vehicle is almost paid off. But generally, to qualify for a car title loan, you must own your car outright – and no longer be financing or leasing the vehicle.
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