Car Title Loans vs Car Loans: What’s the Difference? What You Need to Know

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Consumer debt in America is at a staggering $14-trillion. The four main types of loans that contribute to consumer debt are home, auto, student loans, and credit cards.

If you have a contribution to the country’s consumer debt figures, it’s important you are educated about your own loans. Do you know what loans you have and the amounts owed? Do you know the differences between the loan types and their repayment terms?

This article will address the difference between two common auto loan types — car loans and car title loans. Keep reading to learn the differences.

What Is a Car Loan?

Car Title Loans vs Car Loans

A car loan is a funding mechanism you use to help you purchase a vehicle in the first place. This is a common method, 85% of Americans use financing to purchase a vehicle.

You can receive financing through the car dealership or through an outside bank or credit union. The lender will ask for proof of income, credit score, and down payment. These qualifications will help determine your loan’s interest rate and repayment terms.

You’ll make monthly payments on the loan until it is paid in full.

Different Types of Car Loans 

Now that you know what car loans are, it’s important to understand that there are different types of them.

Car loans are customizable based on the cost of your vehicle, how much of a monthly payment you can afford, and your interest rate.

The terms of your loan will also vary based on whether you have a car loan that is secured or unsecured.

1# Secured Car Loan

A secured car loan is the most common type of car loan. This means that you are providing collateral to the lender in exchange for the funding. Traditionally, the collateral is the car that’s being bought, but it can be any asset worth value.

So when you secure funding from a lender, you’ll receive the vehicle, but the lender receives the vehicle’s title. The lender truly owns your vehicle until you completely pay off the loan. Once you pay off the loan, you receive the title and take over complete ownership.

But, if you fail to pay the loan according to the agreed-upon terms, you risk losing your collateral. In most cases, the lender will repossess your vehicle. Not only will you lose your vehicle, but you won’t receive any of the money back that you already paid on the loan.

2# Unsecured Car Loan

As inferred with the name, an unsecured car loan is basically the opposite of a secured car loan.

Instead of offering collateral, the lender gives you financing based on your written agreement. This means that you have ownership over your car from the beginning, but you’re still expected to pay off the loan.

If you don’t repay the loan, the lender can take legal action to receive the money you owe them.

What Is a Car Title Loan?

car title loan is a loan that can only occur after you claim complete ownership of your vehicle. This means, you already have paid off any car loans and now possess the car’s title.

With that title, you can then apply for a car title loan. In simple terms, this involves using your vehicle as collateral in exchange for a lump sum of cash. The make, model, and year of your vehicle will help determine how much money you are able to receive.

Some lenders do allow you to receive a title loan without completely owning the vehicle. To do this, your vehicle must have a high-value and you must have a significant amount of equity in the car.

A car title loan works the same as any other loan when it comes to repayment. These are generally short-term loans so you’ll be expected to repay the full amount of the loan in just a few weeks or months.

But, the main difference between auto title loans and other financing mechanisms comes in when you fail to repay the loan. While a late payment will result in higher interest rates or fees, repayment failure can lead to losing your vehicle. Since you used your car title loan as collateral, this is something you acknowledge and authorize when accepting the loan.

Car Loans and Car Title Loans Are Completely Different 

After reading this article, it’s clear to see that car loans and car title loans are two completely different financing methods.

A car loan is a financing method that you use to help you purchase a vehicle in the first place. After you own the vehicle, you can then use a car title loan as collateral to fund anything else you need. One financing method helps you purchase a vehicle while the other takes advantage of vehicle ownership.

Wondering what other loan types you may qualify for? Visit the Finance section of this site to discover more content about loans.

Author: Cathy Carter