What Happens When You Default on a Title Loan?

Defaulting on any loan is costly. It will reduce your chance of being approved for credit in the future. If you are falling behind on your title loan payments and are worried about defaulting, then it's possible to get out of the title loan early. Let's look at what happens when you default on a title loan.

What it Means to Default on a Title Loan

What exactly constitutes as defaulting on a title loan the laws can vary from state to state. In general, a loan is in default when you don't make your payments on time or not all. It means that you have broken the contract. At that point, the lender could legally repossess the car to pay off the title loan.

If you are worried about defaulting, then be sure to talk to the customer service team of the lender as soon as you can. Your lender may be willing to work out a new repayment plan or even redefine the terms of the loan to give you more time to pay it back.

Defaulting can cost lenders a lot of money too. They would instead give you the chance to pay off the title loan. If you are upfront about what you need from them, they are willing to listen, and you might be able to work out a deal.

What Happens if You Default on a Title Loan?

If you aren't able to make payments on your title loan on time, then it could lead to some expensive consequences. It affects your ability to get new financing and can even make it harder for you to find a job.

Fees

The fees for a missed payment or repossession depend on state regulations. Individual states have a cap on how much you can be charged for fees, while others allow lenders to charge as much as they want for anything they want.

If a lender repossesses your vehicle, you could be hit with fees to cover the attorney and storage costs.

Repossession

A title loan uses your vehicle title as collateral. Defaulting on the loan will often result in the vehicle being repossessed and auctioned to cover the cost of the loan. The specifics of the repossession process varies by state. Some states require a lender to notify you about defaults within several weeks, but others allow lenders to appear and tow the car away whenever they want. Read your contract carefully.

It is illegal for you to hide your car so that they can't find and repossess it. If the lender feels that you have done this, they can claim a breach of the contract and find other legal means to take possession of the car, including bringing in law enforcement. It's not worth it.

What to Do If Your Car Is Repossessed?

You have a few options open to you if your car is repossessed. You may be able to reclaim the vehicle before it is sold off by paying the loan in full. If you aren't able to do that though, then the lender is fully entitled to take the car and sell it to recover any losses.

You may be entitled to extra money if the sale settles your debt. Let's say that you owed $5,000 in principal, interest, and repossession fees. The lender repossesses the car and auctions it for $7,000. The lender may be legally required to provide you with the extra $2,000. It can work against you, though, as you may have to make up the balance if the car doesn't cover the remaining costs. So, with the previous example, if the car sold for only $3,000, you may have to put up the other $2,000.

Ways to Legally Get out of a Title Loan

There are ways to get out of your title loan, but they all involve talking to the lender and finding a compromise.

Pay off the loan

Paying off the loan is probably the least feasible option if you are having financial problems. If you've got the money though, then contacting the lender and asking them for a payoff amount to pay everything off could prevent defaulting on the loan. Just keep an eye on the loan status and make sure that it is properly closed.

Negotiate with the lender

If you don't have the money to pay off the loan, then talk to your lender. They might be willing to allow you to pay back less than initially agreed upon following some negotiation.

Make sure the new payoff amount is in writing and get things settled quickly. Take note that your credit score could still be affected if the lender reports the settlement to credit agencies. It doesn't count as default, and it isn't as bad as defaulting, but it still makes it difficult for you to qualify for the best rate loans.

Refinance the Loan

Refinancing a loan can help you to reduce your interest rate to save money. Refinancing isn't easy, though. Outside of having to follow legal regulations over refinancing, you might have trouble finding someone willing to refinance the title loan for you.

Another problem with refinancing is that it doesn't get you out of the loan. It means that you move from one loan to another. You still have to make the payments and your credit is still at risk if you don't. You should only consider refinancing if you feel you can make the loan more affordable – and pay off the new loan.

Consolidate your Debt

Debt consolidation is something to consider if you have several sources of debt – such as multiple loans or credit cards. Online lenders and credit unions generally have less strict requirements compared to banks. While you might have trouble qualifying for their best loan, it's likely going to have a lower interest rate than your current title loan. Personal debt consolidation comes with an added bonus in that it doesn't use the car title for collateral. As such, you won't lose the car in the event of a default.

Ask for Voluntary Repossession

Your lender may let you voluntarily surrender the car for repossession. It still leaves you without a car and damages your credit score, but it does close the loan. You'll have more money to get yourself back on your feet and build your credit back up.

File for Bankruptcy

Bankruptcy is always a last resort when it comes to debt. If you have several obligations, though, then you may want to take this final step. However, remember that filing for bankruptcy could still cost you the car, and it's a negative mark on your credit reports for up to 10 years. Declaring bankruptcy makes it practically impossible to qualify for another loan in the future. Be sure to talk to a bankruptcy lawyer about your options.

Bottom Line

Getting an auto title loan is an easy way to get extra money, but there's always the risk of defaulting on the loan and losing the car. If you're worried about defaulting on your title loan, then get in touch with your lender and work on a solution. You could also contact another lender to see if they can buy out your current title loan at a lower rate.