Publish Date - August 22, 2019
Author: Greg Thibodeau
Categories:   Tips & Insights For Car Buying    Auto Loans & Financing    Loan Calculators & Rates    Types of Car Loans    Vehicle & Buying Research    The myAutoloan Difference
Auto vs Title Loans: What's the Difference
Auto loans and car title loans may sound similar, but they are two different things. An auto loan is a loan you get to buy a car. A car title loan is a short-term, high-interest loan that uses your vehicle title as collateral. It’s not used to buy a new car, and could actually lead to you losing your car. Here we’ll dive into the key differences between auto loans and car title loans, and explain when you might want to choose one over the other.
What is an auto loan?
You want to buy a car, but you don’t have enough cash on hand to pay for the car outright. An auto loan is a lump sum of money that’s loaned to you for the sole purpose of buying a new or used car. You pay for the car with the auto loan and then repay the loan, with interest, over an agreed upon number of months.
How much is the typical car loan? According to Experian, the average new vehicle loan hit a record high of $31,099 in 2018, and $19,589 for a used auto loan. The national average for U.S. auto loan interest rates is 4.21% (for a 60 month loan), adds ValuePenguin.
Auto loan terms are getting progressively longer, too. New car loan terms are up to 69 months or more, reports Experian, and the average used vehicle loan has a term of just over 64 months.
If you miss too many payments or don’t pay back your car loan, the car will be repossessed and sold at auction. If the car isn’t sold for enough money to cover your loan, then the financing company may come back to you to collect the outstanding balance, warns Sapling. Your credit score will also take a pretty sizeable hit.
What is a car title loan?
A car title loan is a small, short-term loan that comes with a high interest rate that uses your vehicle as collateral. It has nothing to do with buying a new car. A car title loan usually has to be paid back within 15 or 30 days and can come with a super high interest rate. Car title loans are on the smaller side, like $100 to $5,500, but some lenders offer amounts of $10,000 or more. A car title loan is also called a pink slip loan, title pledge, or title pawn.
Car title loans sound simple enough, right? But you want to approach them with caution.
“The Federal Trade Commission (FTC), the nation’s consumer protection agency, advises you to put on the brakes and understand the costs of a car title loan.”
That’s what it says on the FTC’s website — verbatim — because a car title loan puts you at risk of losing your means of transportation. If you don’t pay the car title loan back in the 15 or 30 day term, then the lender might roll your loan into a new one (with plenty of fees tacked on) or repossess your vehicle. Lose your vehicle and you lose the freedom to go where you want to go, when you want to go.
Car title loans are not only risky, but they’re also expensive. Lenders charge an average of 25% per month to finance a car title loan, reports the FTC. Do the math and the costs can really add up! Here’s an example from the FTC:
If you borrow $500 for 30 days, you could have to pay, on average, $125 plus the original $500 loan amount — $625 plus additional fees — within 30 days of taking out the loan.
It might surprise you to learn, though, that car title loans generally don’t affect your credit score. Most title loan lenders don’t check your credit when you apply for a title loan and paying off a car title loan on time won’t boost your credit score. However, a car title loan will be reported to credit bureaus in the case of vehicle repossession. That has the potential to knock your credit score down, notes the Fiscal Tiger.
Auto Loans vs. Car Title Loans Comparison Chart
|Auto Loan||Car Title Loan|
|What is it?||A loan that’s specifically used to buy a car||A small loan that uses your car as collateral|
|Who gets it?||Someone who wants to buy a new or used car||Someone who needs a small amount of cash, fast|
|Other names for it||Car loan, auto loan, vehicle financing||Pink slip loan, title pledge, title pawn|
|What happens if you don’t pay back||Your car is repossessed||Might roll the old loan into a new loan, or your car could be reposessessed|
|Average amount||$31,099 for a new car loan and $19,589 for a used car loan||$100-$5,500|
|Average Term||60 to 70 months||15 or 30 days|
|Average interest rate||4.21% (on 60 month loans)||25%|
Shop myAutoloan for a car loan today
Now that you’ve compared auto loans and car title loans, which one is right for you? If you’re ready for an auto loan, NOT a car title loan, then apply through myAutoloan to review up to four loans. We’re here to help connect you with your best financing option, not just any financing!