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In an emergency financial situation, you may think about getting a car title loan. However, before you apply for a title loan, you should know about some of the risks involved.

Keep reading to learn more about auto title loans.

What Is a Car Title Loan?

Title loans (also referred to as “pink slip loans") are loans you can get by putting up your vehicle title as collateral. Typically, car title loans are small short-term loans—generally ranging between $500 and $900. Title loan terms usually last 15 or 30 days.

Car title loans are targeted towards people who may not be able to receive a loan through more traditional means (e.g. banks, credit unions, etc.). By using the car title as collateral, the lender is able to take on the risk that the loan may not be repaid.

Applying for a Car Title Loan

To apply for a car title loan, you will need to provide a car loan lender with a clean title (vehicle title free of liens). You should also be prepared to:

  • Complete an application form.
  • Provide your photo ID.
  • Have your car inspected.

Dangers of Car Title Loans

Across the board, financial experts highly suggest that car title loans only be used as a last resort. This is because car title loans are very high-risk for the borrower.

If you are considering taking out a car title loan, keep the following in mind:

  • You can expect to pay around a 25% fee just for taking out the title loan.
  • Interest rates for car title loans tend to be very high. You can expect as high as 300% annually for your title loan.
  • Chances are your car is worth much more than you are going to get for a title loan. Title loans come with very high risk (your car) for very little reward (the loan amount).

Rollover

If you aren't able to pay a title loan off right away, the lender is probably not going to repossess your car. However, they are likely to let you roll over the loan (i.e. let you borrow the loan for an additional term), which will come with additional fees.

Oftentimes, borrowers will get caught in a rollover cycle and incur so much in additional fees and interest that it becomes nearly impossible to repay the loan. This is usually when repossession of the car will take place.

Auto Title Loan Alternatives

Since title loans should be considered only as a last resort, make sure you exhaust all options before applying for a title loan.

If you need cash for an emergency situation, consider these alternatives:

  • Try working with your creditors to set up a payment plan you can realistically afford.
  • Apply for a loan through a bank or credit union.
  • Borrow money from friends and family.
  • Use your existing credit.

While these options may not be ideal, they can be far less risky than taking out a car title loan.

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