Title loans are dangerous, predatory loans that can result in borrowers defaulting on the debt and losing their vehicle. If you’ve found yourself the victim of one of these lenders, consider the steps listed below to get back to financial stability as soon as possible.
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The Dangers of Car Title Loans
A car title loan is a short-term secured loan that uses the vehicle title as collateral. Depending on state regulations, loans usually range from $100 and $10,000. They are usually capped at 25% to 50% of the vehicle’s value. Title lenders base loans on the vehicle’s value rather than the borrower’s credit score, so they seem like a good deal for borrowers with bad credit who need cash fast.
The borrower must either own the vehicle outright or owe a very small amount to qualify for a car title loan. The title must also be lien-free. There is usually no credit check, but the title loan company usually needs to see the vehicle in person (some online lenders will make an exception and go over your car by video). You’ll also be asked to show a photo ID, proof of insurance, proof of residency and usually proof of income. Once the new loan is approved, the lender keeps the vehicle’s title until the loan is paid off.
Pro tip: The main problem with title loans is that lenders often try to trap borrowers in a debt cycle with high APRs and rollovers that can lead to you paying more in interest than what the original loan amount was. There is also the chance of losing your vehicle if you default on the loan.
How do title loans work? Watch this video to learn more:
Auto Title Loan Interest Rates
Title loans usually have an APR of around 300%, an enormously high interest rate for any type of loan. Loan terms tend to last about 30 days but depending on the lender this could get rolled over multiple times.
To give an example of a title loan, say you borrow $1000 with an APR of 300%, which translates to 25% monthly interest. At the end of 30 days, you’d need to repay $1250, not including any additional fees. However, if you aren’t able to make the full loan payment at the end of the loan term, the lender may offer to renew or roll over the loan. Not only does this come with more additional fees, but now you’ll have to pay an additional $250 for every 30-day loan term. So after 60 days, a $1,000 loan will cost you $1,500 due to interest, plus you’ll likely owe more in fees.
Unfortunately, this cycle often causes borrowers to pay more in interest than what their original loan amount was. This can make repayment even more difficult for borrowers.
The Risk of Repossession
If you can’t make your car title loan payments according to your loan agreement, the lender can repossess and sell your vehicle, just like a bank would. What happens next will depend on your state laws.
In some states, the lender must give you 20 days after your vehicle was repossessed to pay the amount you owe in order to get your vehicle back. Also, keep in mind that lenders can only re-sell your vehicle for a commercially reasonable price. A Consumer Financial Protection Bureau study found that, for borrowers who roll over their title loans, one in every five loans ends with the car being repossessed.
How to Get Out of a Car Title Loan Without Losing Your Car
Title loans are almost as bad as payday loans, so you should avoid them as much as possible, and repossession is one of the worst things that can happen to you and your livelihood. However, if you get stuck, there are a few things you can do to legally get out of your loan:
Pay Off the Auto Title Loan
While this is easier said than done, if you have a way of paying off your title loan, this is by far your best option. Once the loan is paid off, you’ll get your title back from the lender and you won’t have to worry about losing your vehicle.
Get an Unsecured Personal Loan
You can get an unsecured personal loan from both brick-and-mortar banks as well online lending sites. Many online lending sites will tell you if your credit score is high enough to qualify. Even if the loan has a high interest rate, the APR and loan term will be more manageable.
Bad Credit Loans
Borrowers with low credit scores or no credit at all could try and take out a bad credit loan. They act as traditional personal loans to help you in a financial emergency with a much higher interest rate due to the borrower’s credit standing. Online lenders like Upstart and Avant are favorable to borrowers with bad credit.
Payday Alternative Loan
These are offered by credit unions as an alternative to predatory payday loans. PALs are loans of $200 to $1,000 with a capped interest rate of 28%. Loan terms are generally between one and six months. Borrowers must be a member of the credit union for at least one month to qualify and can only take out one PAL at a time. One of the biggest benefits to PALs is that borrowers don’t have to deal with shady lenders with their loans so there is zero chance of being scammed.
READ MORE: Why PALs are better than payday loans
Consider a Loan Co-Signer
Getting a family member to co-sign on a loan can help you get better terms and a lower interest rate. Try to get someone who has a really good credit score. And remember the co-signer is the person who picks up the bill on the loan if you are unable to repay it, so be upfront about what your ability is to repay the loan.
Credit Card Cash Advance
A credit card cash advance enables cardholders to withdraw cash based on their credit limit. The interest on these is usually pretty high, and you’ll probably pay a 5% finance charge. But this is still far better than what you’d pay a title loan lender. And usually, if you can pay the full amount when your credit card bill is due — about the same 30 days that you’d get with a title loan — you won’t pay much interest.
If you find yourself unable to make payments, try to renegotiate your loan terms with the title loan lender. And don’t avoid your lender if you’ve already missed payments. That increases the likelihood of your car being repossessed. Lenders are usually willing to work with you, so it’s worth a shot.
Borrowers can also try negotiating with lenders from other debts they may have, such as credit card debt. They may be more willing to work with you and can free up payments that you can direct toward your title loan.
Take On a Side Hustle
If you need help getting enough money to pay off your payday loan, try getting a side hustle for some quick extra cash. Working for DoorDash or Uber is an easy way to sign up and start earning.
Traditional Car Loan
You could try getting a traditional car loan from a bank. If you have bad credit, consider applying through smaller community banks or credit unions. Bigger financial institutions have more rigid requirements. This strategy can either help you avoid a title loan altogether or can be used to pay off your title loan and give you a more manageable payment plan.
File for Bankruptcy
Borrowers who are in a dire situation could consider filing for bankruptcy. However, this is not an ideal option and should be a last resort. There are two types you can file for, Chapter 7 and Chapter 13. The main difference between the two deals with how the debt is repaid. Chapter 7 involves surrendering all your non-exempt property to pay off your debt. With Chapter 13, you create a court-mandated repayment plan that lasts a few years to repay your debt. In either of these scenarios, your title loan debt will be expunged. The costs for bankruptcy can add up, though, and in some cases could total more than what you owe, so it’s important to consult an attorney before you choose to take this route.
By refinancing your home, you can get a lower interest rate on your mortgage, allowing you to allocate more money toward other expenses (like a title loan). Borrowers can also take advantage of their home equity to get themselves out of a bad financial situation. Home equity loans or home equity lines of credit (HELOCs) let you borrow against the value of your home. Mortgage loans already have a much lower interest rate than title loans, so consider this option the next time you need to take out any type of loan.
The difference between the two is that a home equity loan results in a one-time cash payout, while a HELOC allows you to continually borrow against the value of the home.
READ MORE: Second mortgages
Get a New Car
If all else fails and it seems like you’ll lose your current vehicle due to defaulting on a title loan, consider getting a new car. Ensure it’s a cheaper one so you don’t find yourself in the same scenario again, however, make sure to prioritize safety when making the purchase as well.
More Ways to Get Out of a Title Loan
Cash Advance App or Paycheck Advance
A cash advance app — also sometimes called a paycheck advance app — offers small loans that are similar to payday loans because they’re repaid from your next paycheck. The difference is that a cash advance app doesn’t charge interest. Instead, you pay a tip, and maybe a small monthly fee, depending on the app you choose. Dave is one popular option, but there are plenty.
A few require employer participation. If your employer offers paycheck advances through a payment app, this can allow you to gain access to your earned wages early. Apps such as DailyPay, Gusto, Paychex and Paylocity offer multiple options for getting your paycheck as soon as possible.
Even if your employer doesn’t have these options, you could still try requesting a pay advance to help pay off your title loan.
Borrowers can also try peer-to-peer lending sites like Lending Club, Peerform, and Upstart which provide loans up to $40,000. Most of these sites require a credit score of 600 or higher, along with other qualifications.
Another peer-to-peer option is via the r/borrow subreddit on the social media site Reddit. After going to the page, you simply make a post detailing how much you want to borrow, how you will use that money, and how much you’ll repay the lender. While most of these loans are for under $1000, there are cases where the loan amount is much higher.
A lending circle is a strategy where a group of family or friends collectively put a specific amount of money into a fund that is distributed to each group member over time. This typically works in a rotating fashion so that throughout a given year, all members get an equal takeaway of money. This can be a good way to use cash to pay off any outstanding debts you have.
Ask a Friend or Family Member for Help
While it can be uncomfortable, asking those closest to you for financial help might be an option worth considering. Borrowing from them is almost always better than taking out or rolling over a title loan. Ensure you establish a clear repayment plan to avoid any potential tension. You could also take advantage of borrowing via Venmo to simplify the process.
Sell Unneeded Belongings
One way you can make some quick cash is to sell some of your unused items or valuables to raise some money. Have a garage sale, or try eBay, Craigslist or Facebook Marketplace.
Consider Credit Counseling
Consult an accredited, nonprofit credit counseling agency. They can help negotiate with the lender and your other creditors, and set up a debt management plan (DMP) that rolls all of your loans together into a single, more manageable debt with a lower interest rate. Check out this guide from the Federal Trade Commission to learn how to choose a credit counselor.
If You’re in the Military…
Something to be aware of for active duty service members, their spouses and dependents are that they have special legal protections through the Military Lending Act (MLA). For example, it prohibits:
- Requiring bank account access
- Requiring that you pay your title loan by check
- Charging more than 36% APR
- Requiring you to waive some legal rights
- Mandating that you have to create a voluntary military allotment in order to get the loan
- Charging prepayment penalties
Creditors can refuse to give you a loan if you’re an active service member and the loan terms violate the MLA.
Are Title Loans Legal?
Title loans are only legal in some states. These are Alabama, Arizona, Delaware, Georgia, Idaho, Illinois, Texas, Mississippi, Missouri, Nevada, New Mexico, South Dakota, Tennessee, Utah, Virginia and Wisconsin.
In some states, they are completely illegal. For example, in Michigan, it’s illegal for a lender to take physical possession of the borrower’s original title when a loan is issued. Title loans are allowed in some other states because of loopholes in their laws.
For example, in California, the interest rate on title loans is capped for loans up to $2,500, so lenders typically require a minimum loan amount of more than $2,500. This allows the lender to charge a higher interest rate.
Pro tip: Be sure that you check the laws in your state before you apply for any title loan.
The Bottom Line
If you’ve found yourself trapped in a title loan that is hard to escape from, you have more than a few options to try and get yourself out of it. Consider some of the strategies mentioned above to pay off your debt without losing your vehicle. The next time you need cash, avoid title loans altogether in favor of the safer, fairer alternatives out there.
A title loan shouldn’t show up on your credit report as lenders typically do not run a credit check when you apply for one.
Unfortunately, after something has been repossessed, lenders usually report it to the credit bureaus. This is why if you can avoid defaulting on a title loan you absolutely should as you can avoid credit bureaus ever knowing in the first place.
Because repossessions are typically reported by lenders, it goes on your record which future lenders may be able to see. This could make them wary to work with you if you want a new car or they may only offer you unfavorable terms.