A car title loan is a type of loan product that uses the title of a car as security that the loan will be paid off, according to CarsDIRECT. If the borrower fails to pay off the loan, the car title lender can take possession of the car and sell it to receive the money due.
The biggest benefit of a car title loan is that it helps people who ordinarily wouldn't qualify for loans obtain needed credit, notes CarsDIRECT. The loan processing time is just a day or two, and there is generally no credit check involved, since the car stands "good" for the loan and serves as collateral. Most lenders just want to see the car to evaluate it and make sure it meets the criteria for the loan.
The short time period allotted for repayment of a title loan is its biggest pitfall, reports CarsDIRECT. The interest rates on title loans may be low initially, but if the borrower needs to extend the title loan for a period of time, the rate usually climbs. Defaulting on the loan gives the lender the option to take the car and sell it, and if they sell it for more than the borrower owes, the lender is entitled to keep that money as well.