A car title loan can be a quick and easy way to get some much-needed cash for vehicle owners, but it comes with a unique set of risks and challenges.

Luckily, in this guide, we'll walk you through everything you need to know about car title loans:

• An overview of car title loans
• Eligibility requirements
• Application process steps & fees
• Risks and legal protections
• Alternatives to car title loans

Let's get into it!

P.S. — are you a homeowner as well? Borrowing against your home equity instead of your car often leads to higher loan amounts with much lower interest rates. If that sounds like something you'd be interested in, book a free consultation with Lotly; we work with 50+ lenders across Canada to find you the best loan terms.

A quick overview of car title loans

Put simply, a car title loan is a short-term loan that uses the borrower's car title as collateral. If the borrower fails to repay the loan, the lender can repossess their car. It’s a popular option for borrowers with bad credit — especially if they need money for car repairs.

• These loans are typically for smaller amounts (usually ranging from $500 to $50,000)
• Often, they have shorter repayment terms compared to traditional loans.
• Interest rates are relatively high, reaching up to 60%.

You may also encounter them under these names:

• Vehicle title loan
• Auto title loan

Particulars can vary between title loan lenders, including their requirements:

Requirements for obtaining a vehicle title loan

While specific lenders may vary, most will include at least a few of the following requirements:

• A clear title to the vehicle: this is necessary for the lender to have ownership rights over the car in case of default. You typically need full ownership of the vehicle (i.e. not financing it) but this isn't always the case.
• A valid government-issued ID: this is usually to confirm the borrower's identity and age (usually 18 or older) and sometimes residence.
• Proof of income: some lenders may require proof of steady income or employment, while others may accept alternative forms of income such as retirement benefits or disability payments.
• Collision and comprehensive insurance: some lenders may require borrowers to have these types of insurance coverage on their vehicle.
• Age and mileage requirements: some lenders will only accept your vehicle as collateral if it is below a certain age (6-8 years, often) and mileage.

Ensure you understand your lender's specific requirements before applying for a car title loan — it could make or break your payment schedule.

The application process (step-by-step)

The application process for a car title loan is typically fast and simple, as lenders often target borrowers who need quick access to cash. Here’s a general overview of the steps involved:

1. Fill out an application form: this can usually be done online or in person at a physical location.
2. Provide required documents: as mentioned above, you may need to provide proof of income, insurance coverage, and identification.
3. Have your vehicle inspected: most lenders will require a physical inspection of your vehicle to determine its value and condition.
4. Sign the loan agreement: once approved, you will need to sign a loan agreement that outlines the terms and conditions of the loan.
5. Hand over your title: in exchange for the loan, you'll typically need to hand over your vehicle’s title to the lender. To be clear, you can still drive your car during this time.
6. Receive your funds: after completing all necessary steps, you should receive your funds either through direct deposit or in person at a physical location.

Beware of any fees or penalties, interest rates, and repayment terms. It may also be helpful to compare offers from different lenders to find the best option for your financial situation.

Costs associated with car title loans

There are a few costs to remember when considering a car title loan:

• Interest rates: Car title loans often have high interest rates, with an average APR of 30-60%. This means that for every $100 borrowed, the borrower could end up paying $60 in interest over the course of a year.
• Fees: Some lenders may charge additional fees such as processing costs, loan origination fees, or prepayment penalties, as well as title search fees, vehicle evaluation, and lien fees.
• Repossession costs: If the borrower defaults on the loan, the lender may repossess the car. This can result in additional fees for towing, storage, and auction costs.

It's essential to carefully consider these costs and compare them to alternative options before deciding on a car title loan.

Risks of car title loans

Of course, no collateralized loan is without its risks. Here are a few potential drawbacks of car title loans to keep in mind:

• High interest rates and fees: As mentioned before, car title loans often come with high interest rates (up to 60%) and additional costs that can quickly add up.
• Risk of losing your car: Since the borrower's car is used as collateral for the loan, there is a real possibility of losing it if they cannot repay the loan on time. If that means you struggle to get to work and lose income, it can lead to a debt spiral.
• Predatory lending practices: Some lenders may engage in predatory practices, such as offering misleading information or not disclosing all terms and conditions, which can put borrowers at risk.
• Negative impact on credit score: If you default on your car title loan, it can have a negative effect on your credit score, making it harder for you to secure loans or credit in the future.

Carefully consider these potential risks before taking out a car title loan, and ensure you fully understand the terms and conditions.

Legal regulations and protections for borrowers

Car title loans in Canada are regulated primarily at the provincial level, with varying rules and protections depending on where you live. Here are some key legal aspects and protections for borrowers:

1. Interest rates and fees: Interest rates on car title loans can be extremely high, often reaching up to 60% APY, or 47% APR, the maximum legal rate allowed under Canadian law. These loans also come with various fees, including vehicle evaluation, title search, and administration fees. 
2. Borrower rights and disclosures: Lenders must provide clear and transparent information about the loan terms, including interest rates, fees, and repayment schedules. This ensures that borrowers are fully informed before agreeing to the loan. Additionally, some provinces mandate a "cooling-off period," allowing borrowers to cancel the loan within a specific time frame without penalty.
3. Repossession rules: If a borrower fails to repay the loan, the auto title lender has the legal right to repossess the vehicle. However, strict rules must be followed, including providing notice; they must also try to sell the car at a commercially viable price to minimize any deficiencies left on your loan.

You can rest easy knowing several protections are in place to ensure your financial well-being when taking out a car title loan.

Tips for comparing car title loan offers

Hopefully, you've gone out and collected a few different options for car title loans to ensure you're getting the best deal. Here's how to evaluate them:

• Interest rates: This is the percentage of the loan amount that you'll be charged for borrowing. The lower the interest rate, the less you'll have to pay back in addition to the original loan amount.
• Fees: Remember the additional fees associated with the loan, such as application fees or early repayment penalties. These can significantly add to the overall cost of your loan.
• Repayment terms: Look at how long you have to repay the loan and what your monthly payments will be. Make sure it's a feasible timeline and that you'll be able to make payments on time. Pro tip: use this calculator to plan it out.
• Reliability of lender: Research the lender and make sure they have a good reputation. This will help ensure a smooth borrowing experience and prevent any potential scams or fraudulent activities.

As always, it's vital you carefully read and understand the terms and conditions of any loan before signing a contract. If you have any questions or concerns, don't hesitate to ask the lender for clarification.

Alternatives to car title loans

As we've discussed, car title loans often have very high interest rates that increase your risk of repossession. Some alternatives include:

• Personal loans: These are unsecured loans that don't require collateral. They usually have lower interest rates than car title loans (7-14%) and can be used for a variety of purposes, such as consolidating debt or making home improvements.
• Credit union loans: Credit unions are member-owned financial institutions that often offer lower interest rates (6-10%) and more flexible terms than traditional banks. If you're a member of a credit union, it's worth checking if they offer personal or car loans.
• HELOC: A Home Equity Line of Credit (HELOC) is a revolving line of credit that uses your home as collateral. You can borrow up to a certain limit and repay the loan with monthly payments. HELOCs typically offer lower interest rates (6-16%) compared to car title loans, but they do put your home at risk if you can't make payments.
• Home equity loan: Similar to a HELOC, a home equity loan uses your home as collateral. However, instead of a revolving line of credit, it's a one-time lump sum payment that is repaid over time. Home equity loans also typically have lower interest rates (6-16%) than car title loans, but again, there is a risk of losing your home if you default on the loan.

Before taking out any type of loan or using your vehicle as collateral, it's important to carefully consider all options and fully understand the terms and conditions. And if you’re a homeowner? Lotly can help you with those last two. We can guide you in navigating the process and help you find the best deal from our network of lenders across the country.

Get better rates on your loan using home equity with Lotly

Let's quickly recap all we've learned:

• Understand the basics of car title loans. These are short-term loans using your car as collateral, with high interest rates and the risk of repossession if not repaid.
• Meet specific eligibility requirements before applying. Lenders typically require a clear vehicle title and proof of income and may have additional criteria like vehicle age and mileage limits.
• Consider the high costs and potential risks involved. Car title loans come with steep interest rates, fees, and the possibility of losing your vehicle if you default.
• Explore alternatives to car title loans. Options like personal loans, credit union loans, and home equity loans often offer lower interest rates and fewer risks.

If you'd like a safer, more stable option than a car title loan, a home equity loan or HELOC might be the right fit for you. These are loans that use a portion of your home's equity as collateral, and they offer lower interest rates (typically 6-16%) and longer repayment terms compared to car title loans.

Plus, with Lotly's network of 50+ lenders across the country, we can help you find the best deal for your specific needs. Book a consultation to get started today.

FAQs

Can I get a loan on my car if I still owe on it in Canada?

Yes, it is possible to get a loan on your car if you still owe money on it in Canada. However, the amount of loan you can receive will depend on how much equity you have in your vehicle. Lenders may still offer you a loan if they can sell the car for more than the amount owing on the financing plan.

How do I get my title after paying off my car in Canada?

The process for obtaining your title after paying off your car in Canada may vary depending on the province or territory you live in. In most cases, the lender will send you a lien release letter and a transfer of ownership form once the loan has been fully repaid. Your local transportation governing body will then walk you through the steps of changing the ownership records.

Can a car be a secured loan?

Yes, a car can be used as collateral for a secured loan. This means that if the borrower cannot repay the loan, the lender has the right to repossess the vehicle. Car title loans are an example of a secured loan, where the car's title is used as collateral.

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