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Title loans and auto loans are similar in some ways, but there are significant differences between the two. While both are loan products that are secured by a vehicle, they are used for different purposes, are usually offered by different companies, and also have significantly different loan terms.
What is an Auto Loan?
In short, an auto loan is a loan thatâs made in order to finance a car purchase. Most consumers in the United States are familiar with auto loans since roughly 80% of new car purchases and 40% of used car purchases are financed through auto loans or leases according to recent data from the Federal Reserve. While there are different ways to obtain an auto loan, different loan providers, and different product characteristics, all auto loans share that they are intended to finance a car purchase.
Auto loans are offered by a variety of financial services companies, including banks and credit unions, auto finance companies, and car dealerships that offer in-house financing â also known as âBuy here pay hereâ dealerships. Some car manufacturers even offer their own loans in order to increase sales of their vehicles, which is known as captive financing.
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What is a Title Loan?
Title loans, also known as auto title loans or car title loans, are cash loans that are made in order to allow borrowers to take care of urgent personal or household expenses. They are secured by the applicantâs vehicle, which is typically paid-off or close to being paid-off at the time of the loan application. While title loan applicants are allowed to use the loan proceeds for vehicle-related expenses, the use of funds varies based on the applicantâs needs, and typically does not involve the car. Frequently, title loans are used for urgent expenses like past-due bills, pressing medical care costs, rent or emergency travel.
Title loans are usually made, marketed and serviced by specialized auto title loan companies.
Key Differences Between Title Loans and Auto Loans
Both auto loans and title loans involve vehicles, which makes them similar in some respects. For both products, the vehicle is used as a security for the loan, and during the term of the loan, the respective lender has a legal right to the vehicle. In order to properly document the lenderâs legal right to the car or truck, both auto lenders and title loan lenders place a lien on the title for the duration of the loan.
There are however many aspects that make car title loans quite different from auto loans. The key ones include the items in the following table:
| Auto Loans | Title Loans | |
| Loan Purpose | Financing the purchase of a new or used vehicle | Loan proceeds to allow the borrow to take care of urgent expenses |
| Loan Providers | Many different companies, including banks, credit unions, manufacturers, finance companies and dealerships | Typically offered by specialized title loan companies |
| Who Receives the Funds | Funds are usually paid to the seller of the vehicle, often times a dealership | Title loan funds are generally disbursed to the borrower (except for title loan refinances) |
| Customer Profile | Anyone looking to purchase a vehicle | Usually borrowers with less-than-perfect credit who need access to funds quickly |
| Loan Amounts | Usually large. Sufficient to finance the purchase of vehicles, typically several thousand dollars | Usually smaller than auto loans. Can be as little as a few hundred dollars to several thousand dollars, depending on the lender |
| Loan Terms | Usually several years, sometimes up to 72 months or more | Can be very short term (30-60 days), or longer term, depending on the lender |
| Involved Parties | Vehicle buyer, vehicle seller, and the lender | Title loan borrower and the lender |
| Availability | Nationwide | Not available in some states |
As you can see in the above table, there are several important differences between auto loans and car title loans, including the intended use of the loan funds, the loan terms, and availability.
Title loans are available in many states, including large ones like Florida, Michigan and Texas, and smaller ones like Montana, Delaware or Rhode Island.1 However, if you live in New York or Colorado, you may not be able to access car title loans for your cash needs, even though auto finance loans are available there.
How to Apply for an Auto Loan vs. a Title Loan
There are both direct and indirect ways to apply for auto loans.
- Direct: A direct application means that the applicant who is looking to purchase a vehicle applies directly with a bank, credit union or finance company, to secure approval for an auto purchase loan before shopping for a vehicle. Many auto loan providers offer direct applications, which can allow car shoppers to confidently negotiate the purchase of their vehicle, knowing that they are already approved for a loan.
- Indirect: An indirect application for financing a vehicle purchase can be submitted at many car dealerships. When applying indirectly, a vehicle buyer allows the car dealership to send their loan application to prospective lenders, and arrange a loan for them. This can be a convenient way to secure the necessary funds to finance the car purchase, but itâs not guaranteed to offer the best loan possible to the borrower. Itâs also good to keep in mind that arranging financing is a source of profits for car dealerships, and they may âmark upâ the interest rate, which means the rate you end up paying could be higher than the rate that the auto lender would approve you for directly.
Applying for a car title loan on the other hand usually only involves two parties â the applicant and the title loan company â there usually isnât another party involved. There are still different ways to apply for title loans however:
- In-store: Some title loan companies operate as brick and mortar lenders, which means that a visit to a loan store may be needed to apply.
- Online: Other providers offer 100% online title loans without store visit. This can be convenient if you prefer the anonymity of an online process, if youâre not nearby a title loan store, or if you simply donât want to spend your time driving to a store just to apply.
- Over the phone: Many title loan companies also allow applicants to call a loan officer to receive a fast quote for a loan over the phone.
Required Documents for Auto Loans vs. Title Loans
The documents that are required after loan approval but before the loan can be finalized tend to be quite similar for auto loans and title loans. While the specific requirements of course vary based on the applicable lenderâs underwriting policies, itâs quite common to need the following for both auto loans and car title loans:1
- Document to verify the borrowerâs identity (driverâs license, state ID, passport etc.)
- Document to verify the borrowerâs income (pay stubs, bank statements etc.)
- Document to verify the borrowerâs address (utility bill, phone bill, etc.)
Unlike auto loans however, title loan borrowers will also need to be able to provide the vehicle title, except when refinancing a title loan.
Final Thoughts About Auto Loans and Car Title Loans
Now that you understand the differences between auto loans and car title loans, you can make an informed decision to decide which of these products might be a fit for your needs. If you are looking to purchase a vehicle, a title loan wonât be a fit. If you are however looking to take care of an urgent expense and own a vehicle, a car title loan may allow you to use the equity in your vehicle to get the cash you need.1
Apply today for a title loan serviced by LoanMart and find out in minutes what your car can qualify for!1,3
