We’ve all been there – short on cash and needing money quickly. Title loans seem like an easy solution when you’re in a bind. Hand over your car title and get some fast funds, right? Not so fast. Title loans come with huge risks, namely the possibility of losing your vehicle if you can’t repay the loan. Let’s walk through exactly what goes down when you default on a title loan so you can avoid this sticky situation.
Your Wheels May Get Repossessed
Handing over your car title as collateral means the lender can legally seize your ride if you default on the loan. Repossession is no joke – we’re talking someone showing up with a tow truck and driving away with your vehicle.
According to the Consumer Financial Protection Bureau (CFPB), 1 in 5 title loan borrowers face repossession. Yikes! Here’s what you can expect if you stop making payments:
- Grace Period: Most lenders won’t pounce right away if you miss a payment. Many will give you 15 days from your due date before considering you in default. Check your loan agreement for details.
- Repossession Warning: If you blow past the grace period, the lender is required in most states to send a warning notice before repossession. This gives you a small window to become current on the loan again.
- Voluntary vs Involuntary Repossession: Lenders always prefer voluntary repossession where you willingly return the vehicle. It saves them effort and costs. If you ignore warnings, they’ll forcibly take the car which can involve extra fees for you.
- Fees Fees Fees: Besides losing your ride, you’ll get slapped with repossession and storage fees which keeps piling on the debt. According to credit repair company Lexington Law, total costs typically reach $400-$500.
The bottom line is you stand to lose your ability to get around if you don’t repay the loan. For many borrowers, that means not being able to get to work or take care of errands. That’s a huge disruption to your life!
Your Credit Will Take a Dive
Another consequence of skipping out on a title loan is taking a hit to your credit score. Any late payments will get reported to the major credit bureaus. According to credit rating agency Experian, your score could drop by up to 100 points if your vehicle gets repossessed.
Things only get worse if the unpaid debt gets sold to collections. Having an account in collections drags your score down by 150-200 points on average.
The real kicker is negative marks like collections stay on your credit reports for up to 7 years. That makes it incredibly tough to qualify for any kind of future loan or credit card at an affordable interest rate. Essentially, not repaying a title loan now can keep you from accessing credit down the road when you really need it.
Avoid Default By Taking Action
Clearly you want to avoid going into default on a title loan at all costs. The good news is you have options to dodge repossession and credit damage even if you fall behind. It takes being proactive though! Here are some smart money moves to steer clear of trouble:
Come Up With the Money
The most direct route is to hustle and pay off the loan in full. Easier said than done, of course. If friends and family can’t help, consider:
- Picking up a side gig like Uber driving to earn extra cash quickly. You can make $150-$500 working nights or weekends depending on your city.
- Asking for an advance on your paycheck from work. Some employers will give you up to 50% of wages you’ve already earned before payday.
- Selling valuables you don’t need like electronics, musical instruments, or jewelry.
- Withdrawing funds from a 401k account – not ideal but better than defaulting.
Negotiate With Lender
If coming up with the full payoff amount is impossible, the next step is contacting your lender. Explain that you fully intend to repay the loan, but your circumstances have changed. Ask nicely if they would be willing to modify the terms.
According to the CFPB, many borrowers have luck getting a lower monthly payment or longer repayment timeline. It never hurts to ask! Be honest about what you can afford given your situation.
The worst they can do is say no. As long as you stay in communication and show good faith effort, most lenders want to work with you. After all, seizing your car is a last resort for them too.
Refinance or Settle
If the lender won’t budge on terms, look into refinancing with another lender or settling the debt. Refinancing involves taking out a new loan to pay off the old one. You’ll want to shop around for the lowest rates possible.
Settling means offering the lender a lump sum payment that’s less than the full balance owed. They may accept it if the alternative is repossessing a vehicle they’ll have to turn around and sell.
According to credit experts, lenders may let you settle for 60-80% of the payoff amount. Just get any negotiation in writing before sending payment!
File for Bankruptcy
Last option if all else fails is to claim bankruptcy. This involves filing a petition in federal court under Chapter 7 or Chapter 13. The court then can eliminate or restructure debts you have no way to pay.
Chapter 7 bankruptcy erases unsecured debts like credit cards, medical bills, and personal loans. But it does not apply to secured debt like auto title loans. For those, Chapter 13 is the way to go. It allows you to potentially reduce the amount owed and take more time to repay.
Bankruptcy hurts your credit badly short-term but wipes the slate clean going forward. For some borrowers it’s the only path back to financial health.
The Sky-High Costs of Title Loans
If you’re tempted by the quick cash promises of title lending, it’s important to understand exactly what you’ll pay. The costs are astronomical compared to other options.
On average title loans carry an APR of 300%. That means on a $2,000 loan you’d pay over $3,500 in interest by the end of the year! Monthly fees alone run around 25% of the amount borrowed.
It gets worse if you’re unable to repay the balance quickly. The interest keeps accruing and fees pile up each time you extend the loan. This makes the payoff amount balloon out of control.
Instead of digging that hole, dig into alternatives even if your credit isn’t great. Options like credit cards, personal installment loans, and family loans will likely cost a fraction of a title loan if you can qualify.
Sure the approval process takes longer, but saving hundreds to thousands of dollars in fees is well worth it. Don’t get lured in by title loans without understanding the true price tag.
Protect Yourself From Predatory Lending
Hopefully you now understand the gravity of not paying back a title loan. Defaulting creates a world of hurt through repossession, credit damage, and endless debt. If you’re already in the danger zone, take proactive steps to avoid this pain.
Even better – empower yourself to avoid this situation in the first place. Here are some tips:
- Read the loan agreement thoroughly so you understand the terms and timeline before signing. Don’t gloss over the fine print!
- Budget effectively and cut unnecessary expenses so you can actually afford the monthly payments.
- Exhaust all other borrowing options before resorting to title loans which should be a last resort.
- Maintain open communication with your lender if you anticipate any hiccups repaying. They want to get paid, and typically will work with you.
- If you do default, don’t bury your head in the sand out of shame. Take action right away to limit the fallout.
- Rebuild your credit wisely going forward. Pay all bills on time, lower balances, and dispute any errors.
Arming yourself with knowledge on title lending, your rights, and smart borrowing practices is the best defense against predatory lending. You’ve got this!
Defaulting on a title loan puts your transportation, credit, and financial future at serious risk. But you have power to avoid the negative consequences through careful planning and quick action if you do fall behind. Consider all your options, lean on community resources if needed, and keep the lines of communication open with your lender. Avoiding default in the first place is ideal – only use title loans as an absolute last resort!