Some people in need of emergency cash may rush to the nearest car title lender for a quick loan, but that’s far from the best option. A car title loan, also known as a “pink slip loan,” is a short-term loan that requires borrowers to offer their vehicle as collateral for outstanding debt.
Interest rates on car title loans are notoriously high, among other drawbacks, so before you sign up, read and study these eight alternative fundraising strategies first.
Key points to remember
- Car title loans are short-term, require borrowers to provide their vehicles as collateral, and charge significantly higher interest rates than traditional bank loans.
- There are many different lending alternatives, including peer-to-peer loans, short-term bank loans, credit card cash advances, and even charitable donations.
- Borrowers struggling with debt should consider talking to their lenders about lowering interest rates or creating more realistic repayment schedules.
How do car title loans work?
To qualify for a car title loan, a borrower must own their vehicle free and clear and present an unliend title to the lender. A valid ID, current vehicle registration, and proof of insurance, residency, and income are also required. Some lenders also require vehicle keys or insist on installing GPS tracking devices.
Although the amount of a car title loan depends on the value of the vehicle, it is generally capped at half the current value of the car. These loans are short-term – usually 15 or 30 days – and have a three-digit annual percentage rate (APR), which is a much higher interest rate than those associated with traditional bank loans.
Typically purchased by those with limited financing alternatives, car title loans are notoriously expensive. A $1,000 title loan with 25% monthly interest will cost the borrower $1,250 in 30 days, plus lender fees. Failure to repay the loan may result in the loss of the guaranteed vehicle.
Fortunately, there is no shortage of beneficial alternatives to car title loans. The following financing sources and debt reduction methods can help those who need money fast.
Car title loans are generally considered predatory loans.
1. Short-term bank loans
Before committing to car title loans with triple-digit interest rates, borrowers should first attempt to obtain a traditional loan from a local bank or credit union. Even the most expensive bank loans are cheaper than title loans. Additionally, some banks will provide secured loans to borrowers with less than stellar credit. As such, employed people who own cars can pledge their vehicles for bank-level interest rate loans.
If you have credit issues, finding the right loan can be especially stressful during a financial emergency when you need to borrow money quickly. Fortunately, you can still access a variety of emergency loan options even when your credit isn’t great.
2. Credit card cash advances
Although cash advances are notoriously expensive, they still carry interest rates well below triple digits. A borrower with a credit card, a line of credit (LOC) and the ability to repay the loan in several weeks will likely have access to these funds, at a much lower cost.
On the other hand, if the balance is not repaid in a timely manner, interest charges can quickly accumulate.
3. Peer-to-peer lending
Since peer-to-peer (P2P) loans are funded by investors rather than banks, approval rates in these situations are significantly higher than bank loan applications. During this time, interest rates are generally much lower.
Interestingly, the minimum loan amount can be higher than the minimum car title loan amount, so there is a risk of borrowing more than necessary. But prepayment is allowed without penalty.
4. Help from family or friends
Friends and family might be willing to offer or donate the money needed. In loan situations, the parties involved must cement agreed interest rates and repayment plans in written contracts. Although interest rates are expected to be significantly lower than traditional bank loans, a borrower can still offer their vehicle as collateral as a sign of goodwill to lenders.
5. Additional part-time work
If possible, borrowers can supplement their income with temporary employment. Many employers hire people on a case-by-case basis. For those who take the initiative to look, the jobs are there.
6. Social services or charities
State welfare offices, also known as general relief offices, provide emergency cash assistance to eligible individuals. Help may also be available in the form of food stamps, free or discounted child care, and internet services.
Churches and other religious institutions often provide people in need with food, shelter, and educational and career guidance. Individuals on parole or probation should contact their supervisory officers for a list of resources.
7. Negotiate with your creditors
Borrowers who are having difficulty repaying their loans should contact their creditors to discuss the possibility of creating alternative payment terms, lowering interest rates, negotiating discounts, waiving late fees and other concessions.
8. Credit and Debt Counseling
This is an option for people who are chronically short of money or who ritually pay high prices for quick cash relief. They should seek advice from a Certified Consumer Debt Specialist (CCDS). These practitioners can help design a strategy to cut costs, reduce debt, and save for bad weather. Counselors can help borrowers understand the true cost of short-term loans while directing them to better options.
Car title loans are often considered predatory because they are extremely expensive and target low-income demographics. After all, those with the most limited financial resources are the least equipped to pay the high costs.
Title loans quickly trap borrowers in endless cycles of debt that frequently result in the loss of their vehicles. If you need emergency cash and find yourself short on cash, consider the alternatives instead. There is no one-size-fits-all solution when it comes to securing needed cash.