Auto loans and auto title loans. The difference between these two terms is so small-scale, it would almost lead you to believe that they were practically the same thing. However, that isn’t the case — there is a difference between them.

An auto loan is an advance you use to purchase a vehicle. On the other hand, an auto title loan is a high-interest loan offered for the short-term that utilizes your car title as a form of collateral (this is not to be confused with auto equity loans, which are similar, but typically have longer terms). Auto title loans are not utilized to purchase a vehicle.

In this article, we’ll explore the key difference between car loans and car title loans, so that you’re familiar with each and can, as a result, make the best choice to meet your needs.

What is an Auto Loan?

If you’re looking to purchase a car, but lack the funds to pay cash, applying for an auto loan is an alternative. A car loan is nothing more than a sum of capital loaned to you for the sole objective of purchasing a used vehicle. You use the loan to purchase the car and then you repay the debt afterward — with interest, of course — over a specified (and agreed upon) period of time.

The terms of auto loans have a wide range. Some terms are as short as 90 days, while others can go for as long as 60 months or longer.

In the unfortunate event that you skip too many payments, or you stop making them entirely, your vehicle will be repossessed and sent to an auction where it will be sold. And if the vehicle doesn’t recoup enough funds to cover the rest of your debt, then you’ll have the unpleasant experience of dealing with the agents of a financing company to collect. Additionally, you will also have a dinged credit score for your troubles as well.

What is an Auto Title Loan?

An auto title loan is a short-term loan accompanied by a rate of high-interest while it utilizes your car as collateral. There is nothing about purchasing a vehicle that has to do with an auto title loan. The debt of an auto title loan will typically have to be repaid within 30 days, and this is incentivized with its inordinately high-interest.

Auto title loans are usually smaller, somewhere in the ballpark of $100 to $5000. However, there are some that can go over $10,000 (there are always exceptions to the rule). Furthermore, auto title loans are typically referred to as title pledges, title pawns, or pink slips.

Even though it seems like a simple and straightforward concept, you will want to be cautious when considering an auto title loan.

This type of loan puts you in a precarious position because it extends the risk of you losing your vehicle. If you fail to repay the debt in 30 days, the creditor may decide to roll your old loan into a new loan (with compounded fees), or simply repossess your vehicle altogether.

One important piece of information to know is that auto title loans — typically — won’t impact your credit score. The majority of creditors offering title loans won’t audit your credit score when you apply. On the other hand, repaying the loan in the agreed upon time won’t boost your score either.

Essentially, auto title loans are there for you when you find yourself in a bind when life happens and unexpected circumstances come up. Auto title loans can be a saving grace when you need it the most with affordable payment plans and options. However, it comes with the risk of losing your vehicle if you don’t pay off the loan so be absolutely sure that you are paying the loan off according to your repayment terms.