Individuals in need of emergency cash may race to the closest car title lender for a quick loan, but this is no means always the best option. Also called a “pink slip loan,” a car title loan requires a borrower to offer his vehicle as collateral against the outstanding debt.
Although the amount of the loan depends on the value of the vehicle, it is usually capped at half of the car’s present worth. The interest rates of these loans can be up to 650% higher than those associated with traditional bank loans.
- Car title loans require borrowers to put up their vehicles as collateral but 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 charitable donations.
- Borrowers struggling with debt should consider talking to lenders about lowering interest rates or creating more realistic payback schedules.
To qualify for a car title loan, the borrower must own his vehicle free and clear and must present a lien-free title to the lender. Valid identification, current vehicle registration, proof of insurance, proof of residency, and proof of income are also required. Some lenders demand keys to the vehicle or insist on installing GPS-tracking devices.
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 cash.
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.
Credit Card Cash Advances
Notoriously expensive cash advances still boast interest rates well below triple digits. A borrower with a credit card, a line of credit, and an ability to repay the loan within several weeks will likely be granted to such funds, far less expensively.
On the downside, if the balance isn’t paid off in a timely manner, interest charges can quickly pile up.
Because peer-to-peer 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, topping out at approximately 30% annually.
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.
Seek Help from Family or Friends
Friends and family might be willing to front or gift the needed money. In loan situations, parties involved should memorialize 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 his or her vehicle as collateral as a comforting gesture to lenders.
Work 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 for the taking.
Look 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, as well as free or reduced-cost childcare and internet services.
Churches and other religious institutions often supply needy individuals with food, housing, plus education and job referral assistance. Individuals on parole or probation should contact their supervising officers for a list of resources.
Negotiate 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.
Seek Credit and Debt Counseling
This who chronically fall short on cash or ritually pay high prices for quick cash relief should seek the advice of a certified financial counselor. 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 towards better options.
There is no one-size-fits-all solution when it comes to securing needed cash; the efficacy of each option depends on an individual's temperament.
The Bottom Line: Know Your Alternatives
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 quickly trap borrowers into never-ending debt cycles that frequently lead to the loss of their vehicles. Improved money management skills can help borrowers avoid this situation.