Process

The maximum amount of the loan is determined by the collateral. Typical lenders will offer up to 50% of the car's resale value, though some will go higher. The borrower must hold clear title to the car; this means that the car must not be collateral for any other loans (e.g. if it is financed).

The lender will take steps to ensure that if necessary, they can repossess the car. They might hold physical possession of the car throughout the term of the loan, or they might keep a duplicate set of keys. Other companies install GPS tracking devices; one describes a device that permits the lender to remotely disable and re-enable the car's ignition[2].

Typical interest rates are around 300% (APR). The borrower might in some cases be required to make several payments of interest only during the term of the loan. At the end of the term of the loan, the full outstanding amount is typically due in a single balloon payment. If the borrower is unable to repay the loan at this time, then they can roll the balance over, and take out a new title loan. Government regulation often limits the total number of times that a borrower can roll the loan over, so that they do not remain perpetually in debt.

In jurisdictions with rate caps, a similar transaction is sometimes marketed as something other than a loan. One structure is a "sale-leaseback" between the borrower, who sells their car, and the lender, who buys it. The "interest" becomes a lease payment, and the "principal" is repaid when the borrower buys back their car. These structures have attracted regulatory attention; they are forbidden in several US states, including California.