Many options are available to those needing cash for emergencies or other reasons. It is crucial for the consumer to understand the costs and limitations these various lending institutions have when making a loan. Often, in need of cash quickly, the consumer will access the closest car title lender, but this may not be the borrower's best interest or their only option.
Pink Slip Loans
A car title loan, also called a pink slip loan, is a loan where the borrower's vehicle is used as collateral against the outstanding debt. The amount of the loan depends on the value of the vehicle and is usually capped at about half of the value of the vehicle. The interest rates associated with these types of loans are typically much higher than those on traditional bank loans, often 300 to 400% higher, and sometimes up to 650%.
In order for a car title loan to be approved, the borrower must own the vehicle free and clear, and be able to present a lien-free title to the lender. Other required paperwork usually includes valid identification, current vehicle registration, proof of insurance, proof of residency, and proof of income. Some lenders also require keys to the vehicle, or even a GPS-tracking device to be installed.
A car title loan may be considered when a person has an urgent need for cash and believes that their options for raising it are limited. Car title loans are very expensive compared to other types of loans. A $1,000 title loan at 25 percent monthly interest will cost the borrower $1,250 in 30 days (plus any other fees charged by the lender). Those unable to repay the loan risk losing their car.
1. Apply for a Short-Term Bank Loan
Before committing to a triple-digit interest rate on a car title loan, the borrower should exhaust all traditional loan options first. A borrower with a vehicle and a job should apply first at a local credit union or bank. The most expensive bank loan is far cheaper than a title loan, and some banks will make collateral loans to borrowers with less-than-stellar credit, so you might be able to pledge your car at bank-level interest rates.
2. Take a Credit Card Cash Advance
Cash advances are notoriously expensive, yet interest rates do not reach triple digits. A borrower with reasonable certainty of their ability to repay the loan within a few weeks—the normal repayment period for a title loan—and a credit card with an available credit line may be able to access the funds far less expensively.
The danger is the possibility that the balance will take some time to pay off and the interest charges will pile up in the meantime. Any cash advance should be taken with a firm commitment to a short-term repayment plan. On the other hand, borrowers frequently end up rolling over car-title loans multiple times, with even higher costs.
3. Apply for a Peer-to-Peer Loan
A peer-to-peer loan is funded by investors, not a bank, so approval rates are much higher than they are for bank loans. Even for borrowers with poor credit, rates top out at about 30 percent annually (plus origination fees of up to five percent of the loan amount). 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 with no penalty).
(For more information, see Peer-to-Peer Lending Breaks Down Financial Borders.)
4. Get Help from Family or Friends
Friends and family might be willing and able to help out with cash in an emergency. If a gift is not appropriate or possible, the loan can be handled just like any other, with an interest rate, a repayment plan and a signed agreement that makes it all above board. In fact, the borrower can offer their vehicle as collateral if it makes the lender feel more comfortable about offering the loan. The major difference is that the interest rate should not be in the triple digits. It can be a modest, single digit rate, or even zero.
5. Pick up an Extra Part-Time Job
If at all feasible, the borrower can look for extra work to earn the money needed. Some people are quite creative at finding opportunities to generate cash, whether through taking on a freelance project or arranging with business owners to help out in some way on a one-time or ongoing basis. The only requirement is effort. No job will be found by the person who does not look for it and ask around.
6. Turn to 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 or other free or reduced-cost services (such as childcare or internet service). A person in need who is on parole or probation should contact his or her supervising officer for a list of resources. Churches and other charities may have a system in place with which to pay certain bills for needy individuals, in addition to the usual help with housing, food, education and job searching.
7. Negotiate with Your Creditors
A borrower struggling to pay a bill should call the creditor to discuss the situation. Many will offer alternate payment arrangements, a lower interest rate, a discount, waived late fees or other concessions, depending on the debtor's history and situation.
(For more, check out Negotiating a Debt Settlement for a number of helpful tips.)
8. Seek Credit and Debt Counseling
Any individual who frequently falls short on cash – especially someone caught in a cycle of paying high prices for quick cash relief – should meet with a certified financial counselor. There is low-cost and free help available in all 50 states.
The counselor can help you devise a strategy for cutting costs, making ends meet, getting out of debt and saving for a rainy day. If the debt is overwhelming, a debt management plan may be necessary. At the very least, the counselor can help the borrower understand the true cost of short-term loans and how to identify, as well as qualify for better options.
The Bottom Line: Know Your Alternatives
Car title loans are considered by many in the finance industry to be "predatory loans" because they are exorbitantly expensive and target the lowest income demographics – people who have the most limited financial resources and can least afford to pay the high costs. It is not a great stretch of the imagination to think that someone who is desperate for $1,000 today might have a hard time repaying that amount plus an additional $250 at the end of one month. Title loans are known to quickly trap a borrower in a cycle of never-ending debt. Some borrowers who are unable to keep up with the demands of the loan end up losing their vehicles.
A wise course of action for any borrower in need of immediate financial relief is to address the bigger financial picture and get debt under control. There is no easy or quick solution that will solve a person's financial problems when that person is just getting by on a daily basis. Debt counseling is, admittedly, not an immediate answer. That said, the overarching goal of improved money-management skills will benefit the borrower long past the moment of need and could help them avert a similar situation in the future.
(For more information, see The Best and Worst Ways to Raise Cash Quickly.)