Alternatives to Title Loans

How to Avoid Title Loans

Figuring it Out
Explore all of the options before you take on a title loan. sturti / Getty Images

When you need money quickly, it’s tempting to take whatever is available – especially if you have bad credit. But some loans can make your situation worse.

A title loan is an expensive short-term loan that is available when you pledge your vehicle as collateral. If you’ve paid off your car and it’s still worth something, you can keep driving it and get fast cash. Because the loan is secured by your car, your credit scores and income are rarely an issue.

Why Shop Around?

While easy to qualify for, title loans are risky and expensive.

Interest and fees: cost is one of the major drawbacks of using a car title loan. For starters, you’ll probably have to pay some sort of fee to have your loan processed. No matter what the fee is called, it’s basically an additional finance charge on top of the interest you’ll pay – fees make borrowing more expensive. Interest rates are also notoriously high on title loans, and there are often more affordable options out there.

Repossession: when you pledge your vehicle as collateral, it’s fair game if you stop making payments. Lenders have the right to take your car through repossession, and you can never know exactly when that’s going to happen. If you rely on your vehicle to get to work and back, your financial troubles will be magnified. If your car is the safest way for your family to travel, you’ll have additional complications.

Other Types of Loans

Before you get a title loan, rule out all of the alternatives. Even if you have less-than-perfect credit, there might be other ways to borrow.

Banks and credit unions are increasingly offering short-term loans designed to eliminate predatory loans (such as title loans and payday loans).

Your best bet might be to ask for a loan at a small local bank or credit union, since the big banks are quick to reject applications. If you’ve never used a credit union, try it out – credit unions are customer-owned financial institutions that are more likely to look at your individual situation.

Personal loans are available from banks and credit unions, but they’re also available from online lenders. Online lenders include investors with money to lend and old-fashioned peer-to-peer lenders (P2P loans). A personal loan is not secured by collateral (such as your title). Instead, the loan is approved based on your credit scores and your income available to repay the loan. If you have steady income, a personal loan is a much better option than a title loan.

When searching for online loans, be wary of online payday lenders and online title lenders. These organizations might not be any less expensive, and some of them don’t even offer loans – they’re just getting your personal information (to sell it to others or steal your identity).

Credit card promotions can also be an inexpensive way to borrow. Make no mistake: credit cards are risky and you can easily get in over your head, but a one-time loan can help you get your head above water.

Credit cards are especially attractive if you can use a promotional low-interest-rate offer or balance transfer offer. Just watch the fees and make sure you have a plan to pay off the debt.

A cosigner might help you get approved for a more affordable loan from a bank or online lender. Cosigners apply for debt with you, and they promise to pay off a loan if you stop making payments. This is risky for cosigners: they’re responsible for your debt, but they don’t get the benefits of your debt – so it’s a generous thing to do. Only ask a cosigner who completely understands (and is willing and able to take) those risks.

If you’re Borrowing to Make Payments

If you’re tempted to get a title loan so that you can make payments on other debts, evaluate other approaches instead. Taking on debt to pay off debt can put you into a dangerous debt spiral.

Contact your creditors to discuss your options. There might be programs available to help you through a rough patch. For example, student loan payments can sometimes be reduced or temporarily postponed. Other types of lenders might offer a “workout” of some sort.

Credit counseling can help you get a grasp on your situation. In some cases, you might want to have credit counselors negotiate with your lenders and set up repayment plans that fit your budget. These programs are often offered free of charge, but it’s essential to research any counselor you’re thinking of working with. If you get into a payment plan, be aware that your credit may suffer.

Other organizations might provide assistance as well. Contact your local department of Health and Human Services to inquire about programs before you add to your debt burden.