Alternatives to Title Loans
There are safer and less-costly options
When you need money quickly and you have bad credit, it’s tempting to take whatever loan terms you can get. Your options are limited, and title loans may seem like a solution to your problems. But some loans can make your financial situation worse.
A title loan is an expensive short-term loan that’s available when you pledge your vehicle as collateral. If you have a paid-off car that’s still worth money, you can keep driving it and get cash quickly based on the vehicle’s value. Because your car secures the loan, low credit scores and income rarely cause problems.
Why Shop Around?
While easy to qualify for, title loans are risky and expensive.
Interest and fees
Cost is one of the primary drawbacks of using a car title loan. For starters, you typically pay processing fees as part of the loan application. No matter what the fee is called, it’s essentially an additional finance charge on top of the interest you pay. Fees of any kind make borrowing more expensive. Interest rates are also notoriously high on title loans, and other sources of funding (see below) are typically more affordable.
When you pledge your vehicle as collateral, you may lose your car if you stop making payments. Lenders have the right to take your vehicle through repossession, and you never know exactly when that’s going to happen. If you rely on your vehicle to get to work and back, this makes it harder to earn income and your financial troubles can multiply. If your car is the safest way for your family to get around, you risk other consequences, as well.
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 different ways to borrow.
Banks and Credit Unions
Banks and credit unions increasingly offer 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 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 circumstances and approve small loans.
Personal loans are available at banks and credit unions, and 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 vehicle’s title). Instead, lenders approve you based on your credit scores and your income available to repay the loan—but you don’t need perfect credit. If you have a steady income, a personal loan is typically a better option than a title loan.
When researching online lenders, be wary of online payday loans 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
Credit card promotions can also provide 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 on solid ground. 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 banks or online lenders. Cosigners apply for debt with you, and they promise to pay off a loan if you stop making payments. But they take a risk: cosigners are responsible for your debt, but they don’t benefit from your debt, so cosigning is a generous thing to do. Only ask a cosigner who completely understands those risks and one who is willing and able to take over the loan if needed.
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 alternative approaches. Taking on debt to pay off debt can put you into a dangerous debt spiral.
Contact Your Creditors
Contact your creditors to discuss your options. They might offer programs that can 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.
Local 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.
Debt consolidation loans can help you get control over high-interest-rate debt and lower your monthly payment. You take less risk than you would with a car title loan, but qualifying may be hard. Still, you can develop a solid plan to eliminate the debt and present your plan to a lender. In small financial institutions (like local credit unions), that might be sufficient to get you approved.