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What happens if you default on a title loan?

Avoid having your car repossessed and ruining your credit.

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By

Kellye Guinan

Updated

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Defaulting on an auto title loan is expensive and can affect your ability to qualify for credit in the future. If you fall behind on your payments, there are a few ways you can try to get out of the loan — starting with reaching out to your lender to discuss your situation.

What is defaulting on an auto title loan?

Exactly what it means to default on an auto title loan varies by lender and your state’s regulations. But in general, you’re in default when you’ve failed to make a certain number of payments — sometimes just one — and have broken your contract. At this point, your lender can legally begin the repossession process.

If you think you might default, reach out to your provider’s customer service team as soon as possible. It may be willing to extend your loan or work out a new payment plan. Defaulting is expensive for lenders too, so if you’re up front, you may find yours is forgiving of a late payment.

What happens when I default on a title loan?

If you can’t pay your car title loan, you face a number of expensive consequences. These can have a huge impact on your finances — and your ability to get to work.

Fees

The fees you pay for a missed payment or repossession depend on your state regulations. Some states set a cap on how much lenders can charge for late or repossession fees, while others allow lenders to charge high fees for even being a few days late on a payment.

If your car is repossessed, lenders may be able to charge you attorney and storage fees as well as other costs involved with the repossession process.

Repossession

Because you used your title as collateral, defaulting often results in your vehicle being repossessed and sold. But the specifics of the process varies by state. Some require lenders to notify you of default weeks in advance, while others allow lenders to swoop in unannounced and tow your vehicle.

What can you do when this happens? It depends. You could pay off your loan in full and reclaim your car before the lender sells it. However, if you can’t afford to pay, your lender is legally allowed to repossess and sell your car to recoup its losses.

After the sale, you may be entitled to any money left over once your debts are settled depending on where you live. For example, if you owed $5,000 in principal, interest and repossession fees but your vehicle sold for $7,000, your lender may be required by law to compensate you the extra $2,000. However, in some states you’re on the hook to make up the difference if your car sells for less than what you owe.

Will defaulting on a title loan impact my credit?

It can. Short-term lenders usually don’t report your payments to the major credit bureaus. But if you default and have your car repossessed, your lender — or the collection agency your debt is sold to — may report it.

Defaulting on a title loan can stay on your record for up to 15 years. This impacts your ability to get a loan, as many traditional lenders shy away from a borrower who’s defaulted. Not only that, your credit score will likely take a huge hit, keeping you from qualifying for the best rates and terms for loans and credit cards in the future.

How can I get out of a title loan?

There are ways to get out of an auto title loan, but it involves communicating with your lender and coming to a compromise.

Pay off your loan

This is likely the least realistic option if you’re facing large financial issues. But if you have the money, contacting your lender and asking for a payoff amount can prevent default. Just keep an eye on your loan status and make sure it’s closed out properly.

Negotiate with your lender

Don’t have the money to pay off your loan? You may find that your lender is willing to accept less than you agreed on after some negotiating.

Get your new payoff amount in writing and settle things quickly, but know that your credit may still be impacted if your lender reports the settlement. It won’t be as bad as defaulting, but it can still make it hard to qualify for the best rates on any future loans or credit cards.

Refinance your loan

Not all states allow you to refinance your title loan, but if you can, it may help you lower your interest rate and save money. Refinancing with a different lender isn’t always easy, however. Beyond following your state’s laws, you might struggle to find a lender willing to refinance your title loan.

Unfortunately, refinancing your loan doesn’t actually get you out of your title loan. You’re just shifting loans from one lender to another. Your car is still at risk if you can’t meet the payments, so only consider refinancing if you’re sure it will make your loan more affordable.

Consolidate your debt

If you have multiple sources of debt, consider consolidating your debt with a settlement company or lender. Online lenders and credit unions often have less stringent credit requirements than banks. While you may not qualify for the lowest interest rate, it’s likely less than your payments for your auto title loan. And a personal loan for debt consolidation has an added bonus — it won’t use your car’s title as collateral. This means you won’t risk losing it if you default.

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Before you sign up with a debt relief company

Debt relief companies typically charge a percentage of a customer’s debt or a monthly program fee for their services. And not all companies are transparent about these costs or drawbacks that can negatively affect your credit score. Depending on the company you work with, you might pay other fees for third-party settlement services or setting up new accounts, which can leave you in a worse situation than when you signed up.

Consider alternatives before signing up with a debt relief company:

  • Payment extensions. Companies you owe may be willing to extend your payment due date or put you on a longer payment plan if you ask.
  • Nonprofit credit counseling. Look for free debt-management help from nonprofit organizations like the National Foundation for Credit Counseling.
  • Debt settlement. If you can manage to pay a portion of the bill, offer the collection agency a one-time payment as a settlement. Collection agencies are often willing to accept a lower payment on your debt to close the account.

Ask for voluntary repossession

Some lenders allow you to voluntarily surrender your vehicle to close out your loan. This still negatively impacts your credit and leaves you without a car, but like negotiating, you’ll close out the loan. Without large monthly payments, more of your finances are free to help you get back on your feet and improve your credit.

Sell your car

If your lender allows it, you can sell your car and use the funds to pay off your loan amount. If your car has more resale value than you owe on your loan, it could be worth looking into.

File for bankruptcy

Filing for bankruptcy should be a last resort, but if your auto title loan is one of many debts weighing you down, this can eliminate the problem. However, your car can still be repossessed, and bankruptcy stays on your record for seven to 10 years. This making qualifying for a loan much harder in the future. If you’re considering this route, speak with a lawyer that specializes in bankruptcy to learn your best options.

Bottom line

Auto title loans can be a quick and easy way to get the money you need, but they often end in default and repossession due to their high costs. If you fear you could lose your car, contact your lender as soon as possible to find a solution.

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