Car Title Loans: Advantages, Disadvantages, & Alternatives

Car title loans offer quick cash using your vehicle as collateral. These loans are based on your car’s value, not your credit history. You don’t go through a traditional loan process. Though they seem like a good emergency solution, they are difficult to manage. The short terms and high interest rates increase your risk of defaulting. Defaulting can lead to repossession. Finding an alternative to a car title loan is always better. Here’s what you need to know.

What Is a Car Title Loan?

A car title loan is a small, short-term loan secured by your vehicle. These loans are also called title pawn, title pledge, or pink slip loans. The name comes from the pink paper California car titles used to be printed on. Car title loans provide fast cash for bills or emergencies.

In states where they’re allowed, you can drive to a title loan store. You can leave with cash in 15 to 45 minutes. The lender keeps your vehicle’s title until you pay off the loan, interest, and fees.

Like payday loans, title loans are quick to apply for and get. To qualify, you must own your vehicle outright or owe very little. Your title can’t have any liens on it. These loans are based on your vehicle’s value, not your credit history. Title loan lenders usually don’t run credit checks like traditional lenders do.

Title loan companies have to see your vehicle in person. You need to show your photo ID, proof of auto insurance, and sometimes proof of income.

The dollar amount depends on state regulations. The usual loan amount is between $100 and $10,000. Loans are capped at 25%-50% of your vehicle’s value. The typical loan term is 30 days. At the end of the term, a single balloon payment is due. Loan terms vary by state. They can range from 15 days to installment arrangements lasting over a year.

Disadvantages of Pink Slip Loans

Extremely High Interest Rates

Car title loans typically have very high interest rates. Rates of 25% or more are common. You also have to pay document and processing fees. The interest rate isn’t the same as the annual percentage rate (APR).

Because title loans have such short terms, you must multiply the interest rate over a year. For example, an $800 loan with 25% interest over 30 days would have an APR of 300%. Before you sign a loan agreement, know the total finance charge and the APR. The lender must disclose these under federal law.

Dangerous Rollover Cycle

If you can’t pay off a title loan before it ends, the lender may let you roll it over. Rolling over a loan gets expensive very quickly. Using our example of an $800 loan with 25% interest over 30 days: At 30 days, you would pay $1,000 to get your car’s title back. That’s the original $800 loan plus $200 in interest.

If you extend that loan for another 30 days, you’d add $200 more in interest. You’d also pay more fees. The debt snowballs rapidly.

Invasive Loan Terms

If you get a title loan, read the agreement carefully. Make sure you’re OK with all terms and conditions. Some car title lenders may require you to install a GPS system in your car. GPS systems make it easier for them to locate your vehicle if you don’t pay.

Some lenders require borrowers to install a starter-interruption device. These devices allow the lender to remotely disable your ignition system if you don’t pay. Before signing any loan commitment with these terms, consider the disruption they could cause.

Risk of Repossession

If you don’t pay off a title loan by the due date and you don’t roll it over, the lender can repossess your vehicle. They can sell it just like a bank would. You may have redemption rights under your state’s laws to get your car back. But you’ll most likely have to pay additional fees to do it.

Any missed payments on a loan will hurt your credit score. Even if you eventually pay them, the damage is done.

Auto Title Loan Alternatives

Because of the potential to slide quickly into further debt, avoid car title loans. The following suggestions may help you get fast cash without risking your vehicle.

Negotiate Your Existing Debts

If you need money to repay existing debt, ask your creditor for a payment plan. You could also request more time to pay. You can work with our partner Cambridge Credit Counseling to negotiate with your creditors for you.

A credit counseling agency might be able to set you up with a debt management plan. A DMP can help you with your overall financial situation. Participating in a DMP may initially hurt your credit score a little. Over time, it should gradually improve your credit because you’ll be making regular payments.

Request a Pay Advance at Work or Ask for Financial Assistance

Depending on your relationship with your employer, you could request a pay advance. You could also ask your family or friends for temporary financial help. If you take this route, talk about how you’ll pay back the loan. You don’t want to agree to an unworkable payment arrangement under pressure.

Look at your budget beforehand. Make sure you know what kind of loan payment you can realistically afford.

Depending on why you need cash quickly, you might get financial assistance from a church or local charity. You might want to take this route if you need help with medical bills or unexpected household emergencies.

Get a Personal Loan

You may want to try a local credit union or a small community bank. Some federal credit unions offer payday alternative loans (PALs) of $200 to $1,000. They have 1-6 month terms and a maximum APR of 28%. The borrower must be a member of the credit union for at least one month.

There are limits on how frequently a member can take out a PAL. Even though personal loans often have high interest, their APRs are easier to handle than title loans.

You can also find personal unsecured loans online. Many financial institutions offer loans with an online application process. Some lending sites will tell you upfront what credit score you’ll need to qualify. If you have bad credit, you may want to consider asking a family member to be a cosigner.

Get a Credit Card Cash Advance

A credit card cash advance is another way to get fast cash. Cash advances usually have high interest rates. You’ll probably need to pay a cash advance fee of 5% on top of that.

Even with these extra costs, a credit card cash advance will still be easier to handle. It’s less expensive than a car title loan. Plus, you’ll avoid the repossession risk that comes with using your car as collateral.

Refinance With a Car Loan

If you owe nothing or very little on your car, you might want to refinance. You can take out a traditional car loan from a bank. If you have a bad credit history, try a smaller bank or credit union. Their loan qualification process might be more relaxed than a larger financial institution.

The APR on the new loan will be much lower than a title loan’s APR. The monthly payments on a traditional 3-5 year car loan term will be easier to budget.

Sell Your Valuables

You might consider selling some of your personal property or valuables to raise cash. You could use websites or social media to sell your property. You could have a garage sale or yard sale.

How To Choose a Car Title Loan Lender If You Must

If you have to get a car title loan, check out several lenders. Make sure you’re getting the best possible deal. Be sure to carefully read the loan agreement. Make sure you’re aware of all the terms.

Compare interest rates, APRs, and fees across multiple lenders. Ask about penalties for early repayment. Understand the consequences of missing a payment. Know your state’s laws regarding repossession and redemption rights.