Key takeaways
- Car title loans are expensive and risky. They have high fees and short repayment terms that can trap borrowers in debt.
- You can get out of a title loan by paying it in full, refinancing with a more affordable loan, or negotiating with the lender.
- When you default on a title loan, you risk losing your vehicle and negatively impacting your credit score.
Car title loans are easy to get into but tough to get out of. They are expensive and difficult to pay off. If you roll over the loan, it can cost you a lot. If you default, you risk losing your car.
Ideally, you’ll pay the money back in full and be done with it. Not everyone has the resources to do that. Luckily, there are options for getting out of debt fast and saving hundreds, if not thousands.
We’ll review how you can legally get out of an auto title loan and keep your vehicle.
What is a car title loan?
A vehicle title loan is when you borrow money against your car. It is a short-term secured loan that uses your car, truck, motorcycle, or any other vehicle as collateral. Lenders usually do not require a credit check, but you must own the car outright and agree to an inspection. Once approved, you’ll receive a lump sum of cash that is 25% to 50% of the car’s market value.
The problem is these loans are expensive and usually have short-repayment periods of only 15 to 30 days. You are required to make a single or balloon payment at the end of the period that includes the fees. Lenders usually charge a financing fee equivalent to a 300% APR (annual percentage rate) plus additional fees. The high fees and short repayment period make them challenging to repay.
If you cannot repay the money, the lender can seize your vehicle and sell it to recoup their losses.
Ways to get out of a title loan
If you find yourself trapped in a vehicle title loan, don’t worry. There are several ways to escape and regain control of your finances.
Pay the loan
The simplest way is to pay back the money. Repayment stops interest from piling up and ensures you keep your car. Of course, this is easier said than done. Here are a few ideas to round up extra cash:
Take on a side gig: Working for apps like TaskRabbit, DoorDash, or Uber lets you set your schedule. You can make extra money and use it to pay off your debt whenever you have time.
Ask for a salary advance: Some employers will grant you a portion of your upcoming paycheck early for little to no cost. Be sure to budget for a lower amount next payday.
Sell valuable items: Selling used items or valuables can help you raise the necessary cash. Facebook Marketplace and Craigs List make it easy to sell items online.
Get a credit card cash advance: You can use your credit card to withdraw cash up to a specific limit. Cash advances come with high interest rates plus extra fees and can get expensive fast. Still, they can save your car. Make sure you pay the money back as soon as possible.
Ask a loved one for help: This may be the cheapest solution if you have friends or family who can lend you the money. Always write down the loan terms – any interest, fees, and when you’ll pay it back – and communicate openly to avoid straining relationships.
Need $1,000 now and can’t wait?
Refinance the car title loan
Another option is to take out a personal loan with a lower interest rate and longer repayment terms. Then, you can use the money to pay back your lender. This doesn’t solve the main problem—being short on cash—but it can save you thousands.
An unsecured installment loan from a bank, credit union, or online lender should be much less expensive than rolling over your loan. The monthly payments should put less of a strain on your budget than the single balloon payment.
Look into online lenders that consider borrowers with bad credit. These lenders may not do a credit check, and if they do, they will emphasize your employment status, education, and debt-to-income ratio more than your score. While the APRs on these loans will likely be high, they should be much lower than what car title lenders charge.
Payday alternative loans (PALs) are another way to refinance if your credit is poor. Certain federal credit unions offer PALs as a lower-cost option compared to payday loans. You can take out $100 to $2,000 and have six months to a year to pay the money back. Application fees are capped at $20, and the APR cannot exceed 28%. The one catch is you must be a credit union member for at least a month to apply. Credit unions are often worth joining as they are nonprofit institutions.
Refinancing with a lower-cost loan will be less expensive than rolling over your loan and paying additional fees.
Negotiate more favorable terms
Contact your title loan company to see if they can offer more manageable terms. Ask if they can lower your interest rate, reduce the monthly payments (if applicable), or extend the repayment period. Only extend the repayment period if you can also lower the interest rate. Otherwise, you’ll end up paying more over the life of the loan.
New
For negotiations to work, you must demonstrate that you cannot repay the money. Sometimes lenders will work with you to ensure they get paid rather than have you default.
If your lender agrees to negotiate, ensure you can afford the new terms. Don’t agree if you can’t make payments, as they might not be so generous the second time around. Always get the new title loan agreement in writing.
Try debt settlement
If you cannot afford to pay the loan in full but can pay part of it, your lender may agree to a settlement. They will be more willing to agree if you’ve already missed payments. Offer what you can afford to pay and see what the lender accepts. There are no guarantees with debt settlement; it all depends on your lender’s policies and your financial situation.
Approach this option carefully, as it can impact your credit score. If the lender accepts the settlement, they will report your debt as ‘settled for less.’ The negative mark will stay on your credit report for up to seven years. It will drag your score down and make other lenders wary of working with you.
Debt settlement isn’t free. The IRS considers any forgiven debts over $600 to be taxable income. You may be able to get out of paying extra income tax if you don’t have enough money. But talk to a tax professional first.
When you miss payments, whatever you do, do not ignore or avoid your lender. Doing so will undoubtedly lead to vehicle repossession. While debt settlement can hurt your score, it can also get you back on stable ground.
File for bankruptcy
Bankruptcy can offer limited relief for title loans. It will not discharge your debt because it is secured but can make it easier to pay off.
You will have to declare Chapter 13 bankruptcy. Chapter 7 bankruptcy is only for unsecured debts, so your title loan is not eligible.
In Chapter 13, you restructure your debts through a court-approved repayment plan. These plans last three to five years, giving you a more extended pay-off period and potentially reduced rate. You make payments to the court-appointed trustee, who then distributes the money to your creditors. In this plan, you repay your secured debts first and then any unsecured debts. Once the plan is over, the remainder of your unsecured debts will be discharged.
When you file Chapter 13, an automatic stay goes into effect. The automatic stay prevents the lender from repossessing your vehicle even if you’re behind on payments. You can then pay off the loan balance through the repayment plan. If your car’s current value is less than the remaining balance, you may be able to reduce the amount you owe. This is called a cramdown and can be explored with a bankruptcy attorney.
Bankruptcy is not something to be taken lightly. You will get out of debt and receive a fresh start, but at the cost of your credit score. Chapter 13 bankruptcy stays on your credit report for up to seven years. It will drop your score by at least 100 points and make it difficult to borrow in the future. Consult a legal advisor to understand the full implications.
Seek help from credit counseling services
Nonprofit credit counseling agencies can provide expert advice on managing your debt, help you create a realistic budget, and offer financial counseling. Talk to a credit counselor about your debt relief options.
You can enroll in a debt management plan (DMP) if you also have multiple unsecured debts. DMPs roll your unsecured debts into one with a lower, affordable monthly payment. The credit counselor negotiates directly with your lenders to secure lower interest rates and waive fees. You then make one monthly payment to the credit counseling agencies that distribute the money among your lenders.
While auto title loans are secured and not eligible, a DMP can still help you. You can better repay your unsecured debts, potentially freeing up money to pay your title lender.
What happens if you default?
When you default, the lender will report the missed payments to the credit bureaus. They may also send the debt to collections. Having a delinquent account on your credit report will negatively impact your score.
Besides gaining a lower score, the title loan company can repossess your vehicle. They will likely sell it to recoup their losses. If the sale of the car does not cover the full amount you owe, you may be required to pay the difference, called a deficiency balance. On the other hand, if the lender gets more for the car than you owe them, they may have to pay you the surplus money. The exact laws vary by state.
Why you should avoid auto title loans
Auto title loans might seem like a quick solution for cash, but they come with significant risks. They are expensive and have short repayment terms. The high fees, coupled with the single balloon payment, make them challenging to pay off in time.
Most lenders will charge a financing fee that is 25% of the amount you borrow. If you borrow $2,000 with a 25% financing charge, you’ll owe $2,500 plus any additional fees the lender tacks on.
Often, borrowers need to roll over the loan. The lender will charge you an additional financing fee when you roll it over. Say you extend your original $2,000 loan by another 30 days. The lender will tack on another $500 plus any other fees they may charge. In the end, you will have to pay at least $3,000. Rolling over or extending loans can easily trap you in a cycle of debt.
If you are unable to pay, you risk losing your car. The Consumer Financial Protection Bureau found that one-in-five auto title loan borrowers have their vehicles seized. Losing access to a vehicle can lead to a whole host of other problems. Avoid short-term, high-interest loans whenever possible.
Frequently asked questions
1. How much can you borrow with a title loan?
You can borrow from $100 to $10,000, depending on the value of your vehicle and the lender’s policies. The loan amount is usually a percentage of the car’s resale value, often 25% to 50%.
2. How can I get out of a title loan?
Consider refinancing with a traditional loan that has a lower interest rate and more affordable payments. You could also negotiate better terms or a lump-sum payment with the lender.
3. I can’t pay my title loan; what can I do?
If you can’t pay, request a payment plan or an extension. You could refinance with a lower-interest loan. Avoid defaulting, as it risks losing your car and hurting your credit.
Bottom line
Car title loans help you get cash in a hurry but aren’t a long-term solution. Your best bet is to pay the money back as soon as possible. If you can’t afford to, you’ve got a few workarounds. Request better terms from your lender. Refinance the loan with lower interest rates and fewer fees. Potentially even declare bankruptcy. You can prevent repossession and get out of debt with a bit of work.
Once out of debt, stay out. Adjust your budget so that you don’t need to take out another expensive short-term loan. Work on building credit to get better financing options next time you need one. Put money aside in an emergency fund. An emergency fund can serve as a safety net so you will not have to borrow the next time an unexpected expense comes up.
