Title loans offer quick cash without a credit check. That can be tempting, but it can also be dangerous. Interest and fees are high and you could lose your car. These title loan loopholes could offer a way out.
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Four Title Loan Loopholes
The federal government does not regulate title loans. Federal law only requires that the lender disclose the terms and cost of the loan in writing.
Some states ban title loans altogether, some regulate them, and some ignore them. Knowing your state’s laws on title loans may off you some protection against predatory lenders. Loopholes exist in several states. These loopholes may benefit the borrower or they may be used by lenders to avoid other state laws.
1. Does Your Loan Violate State Laws?
Some title lenders violate state laws. They assume that borrowers won’t check, and they’re usually right. If you review your loan carefully you may find that the loan terms are not in compliance with the law. You may not have to pay.
Here’s how to start.
- Review your loan contract carefully. Note the APR, the fees, the term, and any provisions on repossession or loan rollovers.
- Review your state’s laws carefully. Look for any discrepancy between the laws and the contract terms.
- Consider legal advice. You can check the U.S. Government’s legal aid page, the American Bar Association’s legal aid page, or free legal clinics in your area. Ask whether your loophole will stand up legally.
- Confront your lender. If your contract is voidable, you won’t have to pay and the lender cannot repossess your vehicle. Be sure that your contract is voidable before taking this step!
Even if your contract was legal you may be able to exploit other title loan loopholes.
2. Were You Mentally Incapacitated When You Signed Your Contract?
If you were under the influence of alcohol to the extent that your judgment was impaired when you signed the contract, you may have a way out. You will have to prove that you were incapacitated and that the lender’s representative knew it.
3. Were You Under Your State’s Legal Age of Consent?
If you signed the loan contract when you were below the age of consent – 18 in most states – the contract is void and not enforceable.
4. Are You in the Military?
The Military Lending Act (MLA) is designed to protect active-duty service members from predatory lending practices. The MLA includes these provisions:
- You can’t be charged an APR over 36%, including interest and fees.
- Lenders can’t charge you a prepayment penalty if you pay a loan early.
- The interest rate on loans taken out before your military service is capped at 6%.
If you’re a service member and you believe that your rights under the MLA are being violated, consult your nearest Judge Advocate General’s Office.
Many title lenders will not lend to service members because of the MLA.
State Title Loan Laws
Six states have no cap on title loan interest rates, allowing APRs well into the triple-digit range. Title lenders are very active in these states.
- Delaware
- Idaho
- Illinois
- Missouri
- Nevada
- Wisconsin
Title loans are legal with some restrictions on the cost of the loan in these 10 states.
- Alabama
- Arizona
- Georgia
- Mississippi
- New Hampshire
- New Mexico
- South Carolina
- Tennessee
- Utah
- Virginia
If you live in one of these states and have a title loan or are considering one, it’s important to know your state’s laws. There’s a good summary here but you should check your state’s rules in detail.
Lenders Take Advantage of Loopholes in State Laws
Pay particular attention to the rules on surplus or deficiency balance. If a lender repossesses your vehicle, they will sell it at auction. The amount it sells for may be more than the amount of the loan (surplus balance) or less than the amount of the loan (deficiency balance).
Some states allow lenders to keep a surplus balance, others require the lender to return the surplus to the borrower. Some states allow the lender to demand payment of any deficiency balance from the borrower.
These six states have some regulations on title loans, but with loopholes that lenders exploit to offer these loans:
- California (loans over $2,500 only to avoid rate cap on small loans)
- Florida (title lenders operate under consumer finance law, with additional fees)
- Kansas (structured as open-ended credit to avoid rate cap)
- Louisiana (loans over $350 and for terms of 2 months or more)
- Ohio (loans made under credit services organization or mortgage loan laws)
- South Carolina (loans above $600 only to avoid rate cap)
The other 28 states either prohibit title loans completely or apply restrictions that few title lenders are willing to meet. Title lenders typically do not operate in these states. Some borrowers in these states may source title loans online or by crossing state borders.
How Do Title Loans Work?
A vehicle title loan is a short-term loan using a vehicle as collateral. These loans are available to anyone who has full ownership of a car, truck, or motorcycle. You don’t need a credit check or even a job making these loans an attractive option to people with bad credit who need money fast.
If you fail to pay a title loan your vehicle will be repossessed. The Consumer Financial Protection Bureau (CFPB) found that 20% of title loans end in repossession and over 80% are refinanced because the borrower couldn’t make the payment.
READ MORE: What you need to know about title loans + lenders to avoid
Interest Rates are High
Title loan interest rates are high, sometimes over 300% per year. Fees are often added to the interest. The interest and fees make these loans difficult to pay.
The lender will probably quote the interest rate as a percentage of the loan amount. The terms of these loans are very short, so the fee may seem affordable. If your financing cost is 25% of the loan for a 30-day loan, your APR is 25% x12, or 300%, which is very high.
READ MORE: How do title loans work?
Don’t Ignore or Avoid Your Lender
If you can’t afford to make your loan payments, you won’t want to talk to your lender. You still need to. If you negotiate you can roll over your loan and buy time to come up with a solution. It’s expensive, but if you try to avoid the lender you will probably end up losing your vehicle.
READ MORE: Need money today? Same day loans that aren’t payday or title loans
Other Ways to Escape Your Title Loan
If none of those options works for you, consider these possibilities.
- Refinance it with a better loan
- Sell some personal belongings
- Start a side gig
- Use a Payday Alternative Loan
- Use a credit card cash advance
- Sell the vehicle
- Apply for a traditional auto loan
- File for bankruptcy
READ MORE: How to get out of a title loan without losing your car
The Bottom Line
Title loans are expensive and risky, and if you are considering one you should look for other alternatives. You could be trapped in a cycle of rolling over the loans and making multiple payments without ever reducing the loan principal. You could lose your vehicle as well.
If you have a title loan, you should try to clear it as soon as possible, even if it means taking on other debt. Any other loan (other than a payday loan, which you should also avoid) will have a lower interest rate.