Some people in need of emergency cash may rush to the nearest car title lender for a quick loan, but this is far from the best option. An auto title loan, also known as a “pink coupon loan,” is a short-term loan that requires borrowers to post their vehicle as collateral against outstanding debt.
Interest rates on auto title loans are notoriously high, among other drawbacks, so before signing up, read these eight alternative fundraising strategies first and study them.
Key points to remember
- Auto title loans are short-term, require borrowers to pledge their vehicles as collateral, and charge significantly higher interest rates than traditional bank loans.
- There are many loan alternatives, including peer-to-peer loans, short-term bank loans, credit card cash advances, and even charitable giving.
- Borrowers struggling with debt should consider discussing with their lenders the possibility of lowering interest rates or creating more realistic repayment schedules.
How Do Car Title Loans Work?
To be eligible for an auto title loan, a borrower must own their vehicle clear and clean and present an unprivileged title to the lender. 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 usually capped at half of 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, auto title loans are notoriously expensive. A $ 1,000 title loan with 25% monthly interest will cost the borrower $ 1,250 in 30 days, plus the lender’s fees. Failure to repay the loan may result in loss of the secured vehicle.
Fortunately, there is no shortage of beneficial alternatives to auto title loans. The following sources of finance and debt reduction methods can help those in need of quick cash.
Auto title loans are generally considered predatory loans.
1. Short-term bank loans
Before committing to triple-digit interest rate 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. In addition, some banks will provide secured loans to borrowers with less than stellar credit. As such, salaried people who own cars can pledge their vehicles for bank grade interest rate loans.
If you have credit problems, finding the right loan can be especially stressful in a financial emergency when you have to borrow money in a rush. Fortunately, you can still have access to a variety of emergency loan options even when your credit is not optimal.
2. Cash advances by credit card
While cash advances are notoriously expensive, they still have 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 a matter of weeks will likely have access to such funds, much cheaper.
However, if the balance is not paid on time, interest charges can add up quickly.
3. Peer-to-peer loans
Since peer-to-peer (P2P) loans are funded by investors rather than banks, approval rates in these situations are significantly higher than those for bank loan applications. During this time, 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 necessary. But prepayment is allowed without penalty.
4. Help from family or friends
Friends and family might be willing to present or donate the necessary money. In loan situations, the parties involved must cement the agreed interest rates and repayment plans into 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 gesture of goodwill to lenders.
5. An additional part-time job
If possible, borrowers can supplement their income with temporary employment. Many employers will hire people on a case-by-case basis. For those who take the initiative to seek, the jobs are there.
6. Social services or charities
State welfare offices, also known as general relief offices, provide emergency cash assistance to eligible people. Assistance may also be available in the form of food stamps, free or reduced childcare, and Internet services.
Churches and other religious institutions often provide people in need with food, shelter, education and career counseling. Those on parole or probation should contact their supervisory officers for a list of resources.
7. Negotiate with your creditors
Borrowers who are struggling to repay their loans should contact their creditors to discuss the possibility of creating alternate payment terms, lowering interest rates, negotiating discounts, waiving late fees, and other concessions.
8. Credit and debt counseling
Those chronically strapped for cash or ritualistically paying high prices for quick cash relief should seek the advice of a Certified Consumer Debt Specialist (CCDS). These practitioners can help design a strategy to cut costs, reduce debt, and save for rainy days. Counselors can help borrowers understand the true cost of short-term loans while directing them to better options.
The bottom line
Auto title lending is often viewed as predatory because it is exorbitant and targets lower 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 debt cycles that frequently result in the loss of their vehicles. If you need emergency cash and find yourself running out of money, consider the alternatives instead. There is no one-size-fits-all solution to securing the money you need.