VIVA Personal Finance Blog

How do title pawn loans work?

Updated: Sep 16

A title loan is similar to a payday loan in that it is a relatively small loan with a short period of time (under a month) for repayment and high interest rates. Title loans are often predatory and can lead to a vicious cycle of debt.

A title loan agreement will let someone borrow a sum of money in exchange for the title of an asset they own, usually their car or other vehicle, as the collateral. When the term of the loan is complete, the borrower owes the entire principal and interest balance – title loans do not allow for amortization. This means that when time is up, the whole loan amount plus the interest must be paid back at once.

 

What is amortization? It is the ability to pay off a loan with equal payments over time, where each payment is applied to both the principle and the interest.

 

If the borrower is unable to pay the entire principal and interest balance, they will either have to forfeit the asset used as collateral or pay the interest due and “roll” into a new loan contract. This new contract will add more interest and fees, bringing the total much higher. The effective APR on title loans is usually over 100% and can lead to a cycle of debt, because it is challenging to pay off the entire principal and interest balance in a 15 or 30 day loan term.


Title loans, or title pawn loans, are generally not a safe choice for most borrowers. If possible, other options like personal loans should be considered instead.

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