As with any industry, you’re bound to run into dozens of myths and unknowns people bring up about vehicle-secured loans. Financial options and lending and finance terms can be confusing. But it’s important to know how a car title loan works and what to expect when you first apply and then get funded.

At Premier Title Loans, we’ve heard more misconceptions about these loans than we can list here. The fact is, most customers don’t know exactly what’s required or what legal protections they have when dealing with an unscrupulous lender. Let’s get right into our top 4 myths about title loans.

Common Myths About Car Title Loans

1: You must hand over your keys when you take out a title loan.

This myth has been around for years, and it once had some validity. A few decades ago, the only companies that provided car equity loans were pawn shops and mom-and-pop lenders. Much as you would expect if you pawned a guitar or diamond ring, you often had to hand over, or “pledge,” your vehicle as collateral. These days, that arrangement is a different product entirely. It’s called a title pawn, and the two loan offers are not the same.

With a standard car title loan, you keep your keys and don’t have to give up physical possession of your vehicle. Only the car’s title is signed over to your lender, who is added as a lienholder until the loan is paid off. This is the industry-standard model for licensed title loan companies operating online and at retail locations nationwide.

Auto pawns, where a lender holds the vehicle as collateral, are still offered at some pawn shops and smaller local lenders, but they are a different lending product with unique terms and risks. With a standard title loan, you keep possession of your vehicle. Work with a lender that makes this clear up front, has no prepayment penalties, and puts your terms in writing before you sign a contract.

2: You’ll be charged high rates from the start or a prepayment penalty if you pay off your title loan early.

Car title loan companies are similar to mortgage companies, traditional banks, and credit unions in that there’s a lot of competition for your business. If you’re a qualified applicant (meaning you have a lien-free vehicle and proof of income), multiple title loan companies will likely be vying for your business. But they won’t automatically offer you a low rate or reasonable payment terms unless you ask. Take a mortgage provider, for example. The competition in this industry is very high. Customers shop around for the best rates and loan amounts, and a bank or mortgage lender will proactively offer the lowest possible rate to win their business. Compare that to what you see with vehicle title loans. Many of these companies are offering industry-standard rates.

Most consumers fail to shop around for lower interest rates because they believe there’s no flexibility. Take Premier Title Loans, for example, when looking to improve contract terms. Even with this site, ask your customer service rep if they can lower the total fee. Consider how much a secured lender loses when they decline a consumer for any reason. Now, consider how many more applicants they can bring in by lowering their rates. Don’t hesitate to ask your lender to reduce your loan’s rate. It never hurts to ask; the worst they can do is say no.

3: Interest rates are always high with a title loan

In some secured lending contracts, you’ll see interest rates that exceed 100%. That’s why these loans should only be considered for a financial emergency and when you can’t qualify for an unsecured personal loan. However, in some states, the APR for a title loan is similar to that of other bank loans and credit card cash advance fees. For instance, a licensed lender offering title loans in New Mexico offers amounts of $10,000 or less at 36% APR. That type of interest rate isn’t bad for a loan where your credit score isn’t a primary underwriting factor.

Treat a car title loan as a short-term obligation by paying it off as quickly as possible. Instead of paying finance charges month after month, do whatever it takes to pay them off in weeks instead of months or years. Contact your title lender before you take out the loan. Confirm with them that you won’t be charged a prepayment penalty if you pay off the online loan early. This lets you get out from under the high-APR loan obligation, and the creditor gets back the money they lent.

4: You won’t qualify for a title loan if you have bad credit or no credit history

Walk into a bank or credit union, ask for a mortgage equity or personal loan, and see how quickly your application will be denied because of poor credit. The opposite happens when you apply for a bad-credit title loan. This is one of the biggest myths about these loans, and we tell new customers that their credit history matters far less than the equity in their car or truck. When you use your vehicle as collateral for a loan, you add the lender as a lienholder to your vehicle. That gives them more leeway to offer higher loan amounts and approve loans they would never approve if they were unsecured.

We’ve discussed the negatives of this type of secured loan many times, and you could lose your vehicle if you miss payments. On the other hand, you may qualify with almost any kind of bad credit. In some cases, you can even sell a car with a title loan on it. A lender wants to know how much collateral you bring to the table in the form of your vehicle. The more equity your car has, the more cash you can borrow.

Most lenders know they can repossess and sell your vehicle to recoup the initial investment if things go wrong. You need to weigh the two scenarios. Do I need a short-term loan so much that I’m willing to use my vehicle as collateral? Or can I qualify for another unsecured loan without handing over the car’s title?

Whatever you think about title loans, the risks can be acceptable in some cases if you have nowhere else to turn. Complete your application online or call Premier Title Loans at 800-250-6279 to apply and see if a secured loan is right for you.

Jessica Chase

Jessica has been working in the title loan lending industry since 2012. Before that, she managed a team of customer service representatives for one of the largest payday loan companies in the US. Since coming to Premier Title Loans, she’s overseen our sales and marketing department and looks forward to educating consumers on their different financing options. Jessica is always open to feedback and questions related to short term loans!