A car title loan, also called a “pink slip loan,” is a short-term loan that requires borrowers to offer their vehicle as collateral against the outstanding debt. The interest rates on car title loans are notoriously high, among other downsides, so before you sign up for one, read about and investigate these eight alternate cash-raising strategies first.
Key Takeaways
- Car title loans are short term, require borrowers to put up their vehicles as collateral, and charge significantly higher interest rates than traditional bank loans.
- There are many different loan 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 payback 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 a lien-free title to the lender. Valid identification, current vehicle registration, and proof of insurance, residency, and income are also required. Some lenders also demand keys to the vehicle or insist on installing GPS-tracking devices.
Although the amount of a car title loan depends on the value of the vehicle, it is usually capped at half of the car's present worth. These loans are short term—typically 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 procured 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, in addition to lender fees. Failure to repay the loan may cause the loss of the collateralized vehicle.
Fortunately, there's no shortage of favorable alternatives to car title loans. The following financing sources and debt reduction methods can help those in need of fast cash.
Car title loans are generally viewed as predatory lending.
1. Short-Term Bank Loans
Before committing to triple-digit interest rate car title loans, borrowers should first attempt to secure a traditional loan from a local bank or credit union. Even the most expensive bank loans are cheaper than title loans. Furthermore, some banks will make collateral loans to borrowers with less-than-stellar credit. As such, employed individuals who own cars may pledge their vehicles for bank-level interest rate loans.
If you have credit problems, finding the right loan can be particularly stressful when you need to borrow money in a hurry due to a financial emergency. Fortunately, you may still be able to access a variety ofemergency loan optionseven when your credit is less than optimal.
2. Credit Card Cash Advances
Although cash advances are notoriously expensive, they can boast interest rates below triple digits. A borrower with a credit card, a line of credit (LOC), and an ability to repay the loan within several weeks will likely be granted access to such funds—far less expensive than the alternative.
On the downside, if the balance isn’t paid off in a timely manner, interest charges can quickly pile up. Cash advances also come with additional fees and zero grace period—you'll start accruing interest as soon as you receive the money.
3. Peer-to-Peer Loans
Because peer-to-peer (P2P) loans are funded by investors instead of banks, the approval rates in these situations are significantly higher than those for bank loan applications. Meanwhile, the interest rates are generally much lower.
Interestingly, the minimum loan amount may be higher than the minimum car title loan amount, so there is a risk of borrowing more than is needed. But prepayment is allowed without penalty.
4. Help from Family or Friends
Friends and family might be willing to front or gift the needed money. In loan situations, parties involved should cement the agreed-upon interest rates and repayment plans in written contracts. Although the interest rates should be substantially lower than those with traditional bank loans, a borrower can still offer their vehicle as collateral as a gesture of goodwill to lenders.
5. An Extra Part-Time Job
If feasible, borrowers can supplement their income with a temporary job. Many employers will hire individuals on a project-by-project basis. For those who take the initiative to look, jobs are out there. Many retail or service industry jobs may offer same-day pay as an incentive as well.
6. Social Services or Charities
State welfare offices, also called general relief offices, offer emergency cash assistance to those who qualify. Assistance may also be available in the form of food stamps, free or reduced-cost childcare, and Internet services.
Churches and other religious institutions often supply needy individuals with food, housing, and education and job referral assistance. Individuals on parole or probation should contact their supervising officers for a list of resources.
7. Negotiating With Your Creditors
Borrowers struggling to pay down their loans should reach out to their creditors to discuss the possibility of creating alternate payment arrangements, lowering interest rates, negotiating discounts, waiving late fees, and other concessions.
8. Credit and Debt Counseling
This is an option for people who chronically fall short on cash or ritually pay high prices for quick cash relief should seek the advice of a certified consumer debt specialist (CCDS). These practitioners can help devise a strategy for cutting costs, reducing debt, and saving for a rainy day. Counselors can help borrowers understand the true cost of short-term loans while steering them toward better options.
Is a Written Contract for a Loan With a Friend or Family Member Legal?
Yes. If you choose to borrow from a friend or family member and have a written contract, that contract is binding in a court of law. Verbal agreements are harder to prove but may still have weight in small claims court.
Who Should I Call to Ask for a Lower Interest Rate?
If you have high interest credit cards or loans, call the customer service line on the back of the card. You can ask for rate reduction that could reduce your monthly payments. If you have other loans, reach out to your loan officer or contact the customer service number on their website. You may be able to negotiate different payment terms to allow for your current financial situation.
Where Do I Go for a Credit Card Cash Advance?
If you have a PIN for your credit card, you can request a cash advance at most ATMs. If you don't know your PIN, you can go into the lobby of most banks that display your credit card logo. You must provide identification and your credit card to receive your cash.
The Bottom Line
Car title loans are often viewed as predatory because they are exorbitantly expensive and target the lowest income demographics. After all, those with the most limited financial resources are least equipped to pay the high costs.
Title loans can quickly trap borrowers into a never-ending debt cycle that frequently leads to the loss of their vehicles. If you need emergency cash and find yourself coming up short, consider the alternatives instead. There is no one-size-fits-all solution when it comes to securing needed cash.
