A car title loan might have been the right solution when you borrowed it, but title loans tend to be much more expensive than other loans. There are ways to get rid of car title loans to save yourself money and avoid a cycle of debt.
What is a car title loan?
A car title loan is a secured small loan, usually for 25 to 50 percent of your vehicle’s value. According to the Federal Trade Commission (FTC), the finance fee is typically 25 percent of the loan amount per month. So while there is no interest, the effective APR of a title loan sits at around 300 percent.
The lender hands you a lump sum of money, and you turn over your car title and an extra set of keys as collateral. Most lenders require you to have a lien-free title, which means you don’t have a current auto loan.
You will likely need to repay your loan within 30 days. If you don’t pay back your loan on time, the lender can repossess your vehicle or may offer to “roll over” the loan into a new loan. But you add more fees and interest to the amount you already owe, which can result in a costly cycle of borrowing.
How to get out of a car title loan
Getting out of a car title loan requires you to negotiate with your current lender or take out a new, more affordable loan.
Pay off the loan
Depending on your financial situation, paying off the car title loan might not be possible — but it does put the brakes on the borrowing cycle. First, contact the title loan lender and ask for the payoff amount. Then figure out where you can get the money to pay off the loan. Consider using these methods:
- Start a side gig to earn extra money.
- Ask for a salary advance from your employer.
- Sell a valuable item that you won’t miss.
If you do get an advance from your employer or dig into savings, be sure to budget carefully. Ultimately, you want to avoid taking on expensive, short-term debt like title loans in the future.
Consider debt settlement
If you can’t afford the whole payoff amount, figure out what you can afford to pay as a lump sum. The lender may be willing to accept a lower amount, especially if you’ve already missed several payments. This method is called debt settlement. Once you agree to an amount, get the details in writing and make sure both parties sign the document so the lender can’t demand more money later.
The downside is that your credit may take a hit. Although you’ve paid off the debt, it was for less than originally agreed upon. The lender may report the account to the credit bureaus as “settled.” This type of derogatory mark can remain on your credit reports for up to seven years. This may lower your credit score — but you won’t have to worry about being in debt.
Chapter 7 bankruptcy only covers unsecured debts, so a title loan will not be affected. Chapter 13 bankruptcy, on the other hand, restructures your debts to be more affordable. This means you can include title loans in bankruptcy filings and potentially reduce the total amount you owe.
Negotiate the loan terms
Instead of settling the debt, you could negotiate more affordable loan terms. Your lender may be willing to negotiate if you can demonstrate financial need and your inability to repay the current terms.
When you negotiate, request a lower interest rate, lower monthly payment, longer loan term or a combination. Make sure you can afford the new terms and get all details in writing. Keeping your account in good standing at affordable terms will help you pay off the debt and keep your credit healthy.
Extending your loan term could lead to paying more in interest or fees. Depending on how your title loan is structured, you may be able to negotiate the monthly payment to something affordable, but it could cost you more over the life of the loan.
Refinance with a personal loan
Another option is to apply for a new, lower-cost loan and use the funds to pay off the title loan. You can use a personal loan for bad credit to refinance a title loan. Because they are unsecured, you won’t risk losing your car if you are unable to repay.
You’ll have to be sure you qualify for competitive interest rates, although even bad credit loans have rates under 36 percent. The new loan should come with a low fixed interest rate, lower monthly payments and enough time to repay. But as long as the loan comes with better terms, it will be less expensive than constantly rolling your title loan over.
What happens if you don’t pay title loans?
The lender will report missed payments to the credit bureaus and may eventually send your unpaid debt to collections. Both derogatory marks can remain on your credit reports for up to seven years and can negatively impact your credit scores.
The lender may also repossess your vehicle. Some lenders require that borrowers install a GPS device on the car when they take out the loan. So if you default and try to hide the car, the lender can use the GPS to locate it — and may charge you an extra fee. That leaves you with even less money, damaged credit and no transportation.
In most states, lenders must tell you before they repossess your car. If you receive this notice, contact the lender immediately and try to negotiate with the lender or refinance the loan.
The bottom line
A title loan may have been your only option when you borrowed, but you should be able to get out of it. Negotiating with your lender or searching for a bad credit personal loan may help you avoid fees, pay less in interest and prevent repossession. And until you get out of debt, always stay on top of your payments — even if it means making sacrifices in other areas of your budget.