Alternatives to Car Title Loans

Ways to borrow and reduce debt without using a risky title loan

Text reads: "Ways to raise cash (Aside from title loans): Personal loans; cosigned loans; short-term loans from banks and credit unions; credit cards"

Image by Julie Bang © The Balance 2020

If you need money quickly but have bad credit, it’s tempting to take whatever loan terms you can get. Your options are limited, and car title loans may seem like a solution to your problems.

These loans come with risks, however, that can make your financial situation worse. Before you take out a title loan, explore other options for managing your finances and paying off debt.

What Is a Car Title Loan?

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.

Auto title loans are easy to qualify for. Because your car secures the loan, low credit scores and income rarely cause problems. However, they are risky, expensive, and can frequently cause additional financial problems down the road.

Drawbacks to Using a Car Title Loan

Title loans are easy to access if you have a car, even if you have bad credit, no credit, or an unreliable income. However, they come with several drawbacks.

Costly Interest and Fees

Cost is one of the primary drawbacks of using a car title loan. You typically will need to pay processing fees as part of the loan application. These fees are additional charges on top of the interest you pay.

Interest rates are also notoriously high on title loans, often in the triple digits. This means you can end up paying far more than the original value of your loan. More than half of car title loans become long-term debt burdens to borrowers.

Repossession for Nonpayment

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, repossession can make it harder to earn an income, which increases your financial troubles. You can also lose a safe way for your family to get around, which can put you and your loved ones at risk. One out of every five title loan borrowers has their care repossessed for failure to repay their debt.

Alternatives to Car Title 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). Look for a loan at a local bank or credit union, since big banks are often quick to reject applications.

Credit unions are customer-owned financial institutions that are more likely to look at your individual circumstances and approve small loans.

Personal 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. They also offer fixed interest rates which are generally much lower 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. Some of them don’t even offer loans—they’re just getting your personal information and could sell it or steal your identity.

Credit Card Promotions 

Credit card promotions can also provide an inexpensive way to borrow. They are especially attractive if you can use a low-interest-rate offer or balance transfer offer.

Credit cards are risky, and if you are unable to pay off your loan in a timely manner, you could be charged expensive interest. If you can pay back what you borrow in a timely manner, however, a one-time loan can help you get on solid ground.

If you take out a loan through your credit card, pay attention to fees and have a plan to pay off the debt as quickly as possible.

Co-signer

A co-signer might help you get approved for a more affordable loan from banks or online lenders. Co-signers apply for debt with you, and they promise to pay off a loan if you stop making payments. This can help you get approved for a loan if a financial institution won't approve your application on your own.

Co-signers are responsible for your debt, even though they can't use the loan themselves. Only ask for help from a co-signer who completely understands those risks and is able to take over the loan if needed.

Ways to Pay Off Debt Without a Car Title Loan

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 to adjust your payment terms.

Credit Counseling

Credit counseling can help you get a grasp on your financial situation. In some cases, you can 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 set up a payment plan, be aware that your credit may suffer temporarily. However, if you are able to pay down your debt, it will likely recover.

Debt Consolidation

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.

Debt consolidation loans may offer low introductory interest rates, but these can increase after the first year. Be sure you understand all fees and interest rates associated with any loan you take out.

Small financial institutions, like local credit unions, are more likely to approve you for debt consolidation loans, especially if you can present proof of income and show that you have a plan to eliminate your debt in a timely manner.

Local Organizations

Local organizations or government agencies might provide assistance or advice as well. Contact your local department of Health and Human Services, the National Low-Income Housing Coalition, your local Medicaid office, or financial nonprofits in your area to inquire about programs before you add to your debt burden.

Article Sources

  1. Consumer Financial Protection Bureau. "Single-Payment Vehicle Title Lending," Page 3. Accessed Apr. 13, 2020.

  2. Consumer Financial Protection Bureau. "CFPB Finds One-in-Five Auto Title Loan Borrowers Have Vehicle Seized for Failing to Repay Debt." Accessed Apr. 13, 2020.

  3. MyCreditUnion.gov. "About Credit Unions." Accessed Apr. 13, 2020.

  4. First Service Credit Union. "Personal Loans." Accessed Apr. 13, 2020.

  5. Federal Trade Commission: Consumer Information. "Co-signing a Loan." Accessed Apr. 13, 2020.

  6. Consumer Financial Protection Bureau. "What Is Forbearance?" Accessed Apr. 13, 2020.

  7. National Foundation for Credit Counseling. "What to Expect." Accessed Apr. 13, 2020.

  8. Consumer Financial Protection Bureau. "What Do I Need to Know If I’m Thinking About Consolidating My Credit Card Debt?" Accessed Apr. 13, 2020.

  9. InCharge.org. "Financial Help for Low-Income Americans: Resources for Low-Income Families." Accessed Apr. 13, 2020.