Car Title Loans: Advantages, Disadvantages, & Alternatives

Car title loans are an easy way to get quick cash using your vehicle as collateral. These loans are based on your car’s value, so you don’t have to go through a traditional loan process to get one. Though these loans may seem like a good way to deal with an emergency need for cash, they are difficult to manage and increase your risk of defaulting on the loan, which can lead to repossession. It’s best to find an alternative to a car title loan whenever possible. This article will help you understand why.

What Is a Car Title Loan?

A car title loan is a small, short-term loan that is secured by a borrower’s car, truck, or motorcycle. These loans are also known as title pawn, title pledge, or pink slip loans because of the pink paper that California car titles used to be printed on. Car title loans allow borrowers to get fast cash for bills or emergencies. In states where these loans are allowed, an applicant can usually just drive to a title loan store and leave with cash in 15 to 45 minutes. The lender keeps the vehicle's title until the loan, interest, and any fees are paid off.

Like payday loans, title loans are quick to apply for and get. To qualify, the borrower must either own their vehicle outright or owe very little on it. There also can't be any liens on the title. Because these loans are based on the vehicle’s value, rather than the borrower’s credit history, title loan lenders don’t usually run a credit check like traditional lenders do. Title loan companies have to actually see the vehicle in person, and borrowers need to show their photo ID, proof of auto insurance, and sometimes proof of income.

The dollar amount of a car title loan depends a lot on state regulations. The usual loan amount is between $100 and $10,000 and is capped at 25%-50% of the vehicle's value. The typical loan term is 30 days. At the end of the 30-day term, a single balloon payment is due. Loan terms vary by state and can range from as few as 15 days to installment arrangements that last over a year.

Disadvantages of Pink Slip Loans

Car title loans typically have very high interest rates. Rates of 25% or more are common, and borrowers also have to pay document and processing fees. This interest rate isn’t the same thing as the annual percentage rate (APR). Because title loans have such short terms — often only 15-30 days — you must multiply this interest rate over a year’s time to get the APR. For example, an $800 loan with 25% interest over a 30-day term, would have an APR of 300% (25% x 12 months = 300%). Before you sign a loan agreement, be sure you know the total finance charge (a dollar amount) and the APR (a percentage). The lender is required to disclose this under federal law.

If you can't pay off a title loan before the loan term ends, the lender may let you roll the loan over into a new loan. But rolling over a loan can get expensive very quickly. To show this, let's use the prior example of an $800 loan with 25% interest over an initial 30-day term. At 30 days, you would have to pay $1,000 to get your car’s title back. That’s the original $800 loan plus the 25% interest, which amounts to $200. If you extend that loan for another 30 days, you’d add $200 more in interest to your balance as well as more fees.

If you decide to get a title loan, make sure you read the agreement carefully and you’re OK with all of the terms and conditions. Some car title lenders may require you to install a GPS system in your car to make it easier for them to locate the vehicle if you don’t pay. Some lenders will even require borrowers to install a starter-interruption device, which allows the lender to remotely disable your ignition system if you don’t pay. Before signing any loan commitment with these kinds of terms, you should carefully consider the disruption they could cause in your life.

If you don’t pay off a title loan by the loan’s due date and you don’t roll it over into a new loan, the title lender has the right to repossess and sell your vehicle just like a bank would. You may have redemption rights under your state’s laws to get your car back before the lender sells it, 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.

Auto Title Loan Alternatives

Because of the potential to slide quickly into further debt, it’s best to avoid getting a car title loan in the first place. The following suggestions may help you get fast cash without resorting to a car title loan.

Negotiate Your Existing Debts

If you need money to repay existing debt, you could ask your creditor for either a payment plan arrangement or more time to pay. You could also work with an accredited, nonprofit credit counselor to negotiate with your creditors for you. A credit counseling agency might be able to set you up with a debt management plan (DMP) to help you with your overall financial situation. Participating in a DMP may initially hurt your credit score a little, but over time, it should gradually improve your credit because you’ll be making regular payments that lower the balances on your debt.

Request a Pay Advance at Work or Ask for Financial Assistance

Depending on your relationship with your employer, you could request a pay advance if you’re struggling with a big or unexpected expense. You could also ask your family or friends for temporary financial help. If you take this route, make sure you talk about how you’ll pay back the loan so that you don’t agree to an unworkable payment arrangement under pressure. You’ll want to look at your budget beforehand to make sure you know what kind of loan payment you can realistically afford.

Depending on why you need cash quickly, you might be able to get financial assistance from a church or local charity. For example, you might want to take this route if you need help with medical bills, expenses related to your children’s well-being, or unexpected household emergencies.

Get a Personal Loan

You may want to try a local credit union or a small community bank for a personal unsecured loan. Some federal credit unions offer payday alternative loans (PALs) of $200 to $1,000 with 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, and there are limits on how frequently a member can take out a PAL. Even though personal loans often have high interest, their APRs and loan terms are still easier to handle than title loans.

You can also find personal unsecured loans online. Many financial institutions offer loans with an online application process, and some lending sites will tell you upfront what credit score you’ll need to qualify. If you have bad credit, you may also want to consider asking a family member to be a cosigner on a personal loan, which could give you a better interest rate or better terms.

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, and 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 and 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 your car by taking out a traditional car loan from a bank. If you have a bad credit history, you could try a smaller bank or credit union because 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, and the monthly payments on a traditional 3-5 year car loan term will be easier to budget than the payoff of a title loan.

Sell Your Valuables

Finally, 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, or you could have a garage sale or yard sale.

Let's Summarize...

Car title loans are a fast and easy way to get cash, but they should be used only as a last resort. These loans are risky because their short loan terms and high APRs make them difficult to pay back, which increases your risk of repossession. The best thing to do is to find an alternative way to come up with the money you need. You can also seek the help of an accredited credit counseling agency to deal with your existing creditors if that’s the reason you need fast cash. 

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