Know the risks before using your car as collateral for a loan

(NC) If you need to borrow money, there’s lots to consider. There might be times when you need a short-term loan and you’re looking at what makes sense for you, but not every type of loan is right for everyone.

If you have a low credit score and own a car or other vehicle such as a motorcycle or boat, you might consider a title loan. It also goes by other names, such as vehicle collateral loan. Under this type of loan, you can use your car or other vehicle as a promise to pay back the money.

While this might seem like a tempting way borrow money for the short term or an emergency, it’s important to know that if you don’t make your payments, you could lose your car. Beyond the inconvenience, this can affect your income by making it harder for you to get to your job or adding extra commuting costs. Title loans are also an expensive way to borrow money.

How do they work?

Title loans are usually for between three months and three years. Banks and credit unions do not offer these types of loans. You can only get them through alternative lenders or online.

Typically, they come at a high cost. When you add on extra fees, the total interest rate can be as much as 60 per cent per year.

It’s also important to know that not all title loans are the same. For example, you might not qualify with some lenders if you owe money on your car. 

What else should you consider?

As with any loan, make sure you don’t borrow more than you need and have a plan to pay it back.  Don’t stretch your budget to the limit or risk losing your vehicle. And, finally, make sure you understand your contract. Ask for a copy of the agreement before you sign so that you understand the total cost of your loan, the amount and timing of payments, and the interest rate.

Also be aware of any unexpected conditions. For example, lenders may install at Global Positioning System (GPS) to track your car. They may also install a car immobilizer that allows them to shut off your car’s starter remotely. They may charge you to install these devices, then use them to seize your car if you default on payments.

With title loans, there is a lot to consider. Do your homework and find out what you need to know. At the Financial Consumer Agency of Canada, you can get unbiased information and tools to help you manage your money. Learn more at


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