Title Loan Contracts: An In-Depth Guide

You have an emergency, and you need cash fast. So, you’re considering a car title loan. After all, these secured loans have helped scores of people facing unexpected expenses such as medical bills or post-storm home repairs. To qualify for a title loan, you primarily need a steady income and a vehicle in your name. What you don’t need is good credit or a bank account.¹

Before you can access funds through an auto title loan, however, you must sign a title loan contract. But what is such an agreement and what’s important to understand about it? Here’s an in-depth guide.

What is a Title Loan Contract?

A title loan contract is a loan agreement between a title loan lender and a borrower, which reflects that the borrower uses their vehicle title as collateral for a secured loan. 

The contract specifies the loan amount, interest rate, any fees, repayment terms, and all other terms of the loan.

Key Components of a Title Loan Contract 

While each lender has its own policies and procedures, every title loan contract should have the following components that define the key terms of the loan:

• Truth in Lending Act disclosures: The Truth in Lending Act disclosures include the key terms of the loan, including the amount financed, amount of total payments, Annual Percentage Rate (APR), and finance charge. Note that the total payments and finance charge are calculated assuming that a borrower pays the loan on-time as agreed.
• Itemization of amount financed: The itemization of the amount financed breaks down the total loan amount into various components as applicable. For a title loan, the components that make up the amount financed typically include the amount that is disbursed to the borrower, the amount that is used to pay off any existing loans, also known as the payoff, and any applicable fees. 
• Typical fees associated with title loans include Department of Motor Vehicles fees (or equivalent) and origination fees. Other fees may include Credit Services Organization (CSO) service charges that apply to certain title loans in Texas 

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How Do Title Loans Differ from Other Loan Types?

Compared to traditional bank loans, car title loans are much easier to qualify for, and approval and processing times tend to be much faster.¹  Auto title loans usually have competitive interest rates that are often lower than rates for payday loans or other subprime loan options.¹

As opposed to some auto pawn loans, which require that borrowers relinquish their vehicle until the loan is paid off, auto title loan customers can use their vehicle as usual while their loan payments are up to date.¹

How Title Loan Contracts Work

Understanding Loan Terms and Conditions 

Before signing a title loan agreement, it’s important for borrowers to know and understand all loan terms and conditions:

• Loan amount: The specific sum of money the consumer is borrowing.
• Proceeds: Funds issued to the borrower after the loan is finalized. which equals the loan amount minus any fees or closing costs deducted by the lender, and the payoff amount.
• Payoff amount: The total amount needed to completely satisfy an existing loan that’s being refinanced.
• Late fee: The charge a borrower must pay if they do not make a loan payment by its due date.
• Return payment fee: A return payment fee may be assessed when a borrower makes a payment that is not honored by their bank – for example due to insufficient funds in the account.
• Department of Motor Vehicles (DMV) fee: The fee the DMV or its equivalent charges for processing the lien placement on the vehicle title.
• Prepayment penalties: Fees the lender may charge if the borrower pays off the loan early. With title loans serviced by LoanMart, there are no pre-payment penalties!

Interest Rates, APR, and Repayment Schedules in Title Loan Contracts 

The interest rate is the percentage the lender charges on the borrowed auto title loan amount, and is the main cost of borrowing money. Loan origination fees are additional charges the lender sets for processing a loan. Together, these costs determine the borrower’s annual percentage rate (APR), which reflects the annual cost of borrowing. 

A repayment schedule in a title loan contract is the agreed-upon plan that outlines how and when the borrower must make payments to repay the loan. While the schedule defines by which date minimum payments must be made, title loan borrowers can pay earlier, more often, or make larger payments in order to pay off their loan faster than scheduled!⁵

Other Title Contract Clauses

Other important loan contract clauses can include an arbitration agreement clause and various rights that the borrower and lender have under the contract, including the borrower’s right to cancel the loan within a certain period.⁴ Before signing, borrowers should carefully read the entire agreement and make sure they understand and agree with all provisions.

Examples of Title Loan Specific Clauses

Here are examples of contract clauses a borrower might find in their title contract that may not be as common in other types of loan agreements:

• Customer right to rescind: Not offered by all lenders, this clause refers to the consumer’s legal right to back out of the loan agreement within a limited period after signing.⁴ Some title lenders voluntarily offer a right to rescind so that borrowers can sign a loan agreement with more peace of mind.
• Rules for the vehicle securing the loan: Since car title loans are secured by the vehicle, title loan contracts usually include provisions that limit what the borrower is allowed to do with the vehicle while the loan is open. For example, title lenders may require that the vehicle must not be modified or taken out of the U.S., and that the borrower has a minimum level of car insurance coverage. 
• Security interest: Since auto title loans work by securing loan repayment with the borrower’s car or truck title, the loan agreement normally includes a contract clause that confirms that the borrower agrees that the lender has a valid, legal interest in the vehicle while the loan is outstanding. By agreeing to this clause, the borrower usually also agrees to assist the lender with any paperwork necessary for the lender to place a lien on the title.

Legal Considerations in Title Loan Contracts

Consumer Rights and Protections

Consumer rights and protections are also an important aspect in car title loan agreements. These can include:

• Disclosure Requirements and Transparency: Lenders must provide clear, comprehensive information about the loan terms.
• Interest Rates and Fees Regulation: To prevent exorbitant costs and debt cycles, laws often cap the maximum interest rates and fees lenders can charge.
• Right to Cancel or Rescind: Borrowers may have a “cooling off” period after signing during which they can cancel the loan without penalty.⁴
• Repossession Policies: Lenders must follow legal requirements before repossessing a vehicle. While the requirements can vary by state, they may include a minimum number of days that a loan must be past-due before a lender can attempt to recover the vehicle, or include certain notification requirements before doing so.
• Complaint and Dispute Resolution: Mechanisms for borrowers to address grievances with lenders.

Definition and Consequences of Defaulting on a Title Loan

Depending on the lender or loan servicer, borrowers can default on a title loan in multiple ways, including by missing payments, making false statements on the loan application,  or breaking the vehicle-related provisions of the title loan contract.

When a borrower defaults on the auto title loan, there are several potential consequences. They can include that certain fees are added to the loan, such as late fees in the case of late payments. They can also ultimately also result in the title loan lender or servicer looking to recover the vehicle through repossession.

Evaluating Your Options: Alternatives to Title Loans 

Pros and Cons of Title Loans

Title loans can be lifesavers, but borrowers should be certain they can pay the loan back before signing a loan agreement. Otherwise, they risk losing their vehicle and damaging their credit. If they manage their loan responsibly, borrowers can potentially improve their credit score if their title loan lender or loan servicer reports payments to the credit bureaus. 

Car title loans oftentimes have short repayment terms, but can offer fast access to cash, easier approval, and potentially larger amounts and lower interest rates than payday loans.¹

Other Financing Options Available

Consumers with poor or limited credit who lack access to traditional banking products may still have alternatives to title loans. Depending on state regulations, available options can include:

• Car pawns: The borrower uses their vehicle title as collateral to secure a short-term loan. The lender usually keeps the vehicle until the borrower repays the loan.
• Car title lines of credit: This option allows borrowers to repeatedly draw funds against their vehicle, which serves as collateral.
• Payday loans: Short-term loans that borrowers must repay in full on the borrower’s next payday.

When to Consider Alternatives to Title Loans

It’s usually a good idea for potential borrowers to consider all options before applying for a loan and signing a loan agreement. When evaluating alternatives, potential borrowers may even decide that they don’t need a loan after all. This can especially apply for consumers who are able to:

• Get financial help from friends, family or non-profits
• Access an existing credit card or line of credit
• Negotiate with existing creditors for payment plans or extensions
• Sell personal valuables to raise necessary funds

To avoid financial stress, it’s important to understand all title loan contract clauses before taking out a loan. Title loans serviced by LoanMart take pride in a transparent lending process and its customer support. Borrowers who have questions can always call LoanMart at 855-422-7412.

Apply for an auto title loan serviced by LoanMart!