How To Get Out of a Title Loan Without Losing Your Car

How To Get Out of a Title Loan Without Losing Your Car - hero

By Lauren Bringle, AFC®

If you need money fast for a short period of time, you may be tempted to take out an auto title loan, usually for 25% to 50% of your vehicle’s value.[1]

Here’s how these loans work: A car title loan is a short-term loan, usually repayable in 30 days, in which you use the title to your car to guarantee repayment as part of the loan agreement. The loan company will send a representative out to inspect your car and, based on that inspection, can make you a loan based on a portion of its value.

As part of the loan, title lenders take the title to your car as collateral while you continue using the car. After one month, you’re responsible for making a single payment: the principal you borrowed, plus a balloon payment that constitutes the interest on the loan or the fee you pay for taking it out.

If you fail to repay the loan, the lender has the right to repossess your car.

You can avoid losing your car from a title loan by negotiating new terms or paying off the loan balance. If you can improve your credit, you may be able to qualify for a better loan and refinance the car.

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How to get out of a title loan

There are a few ways you can get out of a title loan. You can renegotiate the loan terms, or you can pay off the loan’s balance. Some possible ways to raise the money to repay the loan include earning and saving money fast, selling some of your valuables, asking for a salary advance, or swapping your ride for something more affordable.

Renegotiate the loan terms

If you know you won’t be able to pay off the terms of the loan, contact the lender and see whether they’ll be willing to accept a lesser amount.

The lender may be willing to accept your offer — or make a counterproposal — because the lender is likely less interested in your car than in receiving payment in cash. In a car title loan, the vehicle title is more incentive for you to pay than an end in itself for the lender, who would have to sell it to convert it to cash. In short: taking a lesser amount may be worth it to avoid the hassle and the potential for not getting what it’s worth.

Of course, if you want to renegotiate, you’re at the lender’s mercy: They may or may not agree to negotiate a debt settlement. And even if they do, your credit score may suffer if the lender reports your account to the credit bureaus as settled rather than paid.

Pay off your balance early

You can get out of a car title loan faster by paying off the balance early. In order to do so, you’ll need to come up with the money. Here are some ways you might consider:

Save up money fast

Ask your employer for any overtime opportunities that could enable you to make some extra money. Or take on a temporary side job, such as:

  • Making deliveries
  • Mowing lawns
  • Walking dogs
  • Cleaning houses
  • Babysitting

Sell your valuables

Take stock of what you’ve got around the house that you could sell quickly to make some money. Look in your attic for clothing, antiques, collectibles, stitchery patterns you never used, old books, anything you think might sell. Consider that coin or stamp collection that’s gathering dust.

If you have furniture or exercise equipment you aren’t using or don’t need, put it up for sale on eBay, Facebook Marketplace, or another online seller. You can sell on Amazon, or if you have arts and crafts for sale, check out Etsy or Ruby Lane. Or set up your own online store.

If digital isn’t your thing, another possibility is gathering everything you have in one place for a good old-fashioned yard sale. Shoot for a Saturday, when people are likely to be out for a drive (Sundays may be less profitable because many people are in church or relaxing in the afternoon before heading back to work the next day).

Yard sales are particularly popular during the spring. Put up colorful signs advertising “vintage” or “antique” items that point the way clearly to your sale. Assemble as many kinds of items as possible to appeal to the broadest variety of buyers, and arrange your merchandise in an appealing way — don’t just throw it out there.

And think about coordinating with neighbors on a block sale: that will be an even bigger draw. Some communities even host specific garage sale weekends to draw more buyers to the neighborhood, so do your research and plan accordingly.

Ask for a salary advance

If you’re on salary or your boss doesn’t have overtime to offer, ask for a salary advance. Be transparent with your employer about why you need the money, and explain that it’s a one-time request.

Before you try this, though, check out your company’s policies to see whether it’s a viable option. Then, if it is, schedule a meeting with your supervisor specifically to discuss your request. Finally, get your agreement in writing, including a timetable for repaying the advance.[2]

Sell your car and purchase a cheaper one

Find a buyer for your car and sell it, then use the money to pay off the title loan. One potential stumbling block to this approach is that you don’t have title to the car — the loan company does. You’ll have to find a buyer who’s willing to trust that you’ll pay off the loan to regain the title, then transfer it once that’s done.

You can then use whatever money you have from the transaction to buy or put money down on a cheaper ride.

Refinance

One good reason to improve your credit is to see if you can qualify for a loan with better terms. You can then take out a refinance loan at lower interest rates with no collateral required.

You can also ask a family member for help, either with a low-interest loan or by cosigning on a loan to pay off the auto title debt.

Consequences of not paying your title loan

Not paying your title loan can be costly in a number of ways.

First and foremost, you risk having your car repossessed. Since you put it up as collateral, the lender has the right to take it if you don’t pay what you agreed to.

You may be able to extend the loan, but you’ll probably be on the hook for costly late fees for failure to pay — if that’s even an option. Other fees under headings like application fees or processing fees may be charged, and you may even be required to take out a roadside assistance package.[3]

Failure to pay may also damage your credit because the lender may report any missed payments or defaulting on the loan to the credit bureaus. These negative marks can stay on your credit report for seven years.

When prioritizing your debt payments, pay off high-interest loans like a car title loan first, because they’ll end up costing you more in the long run than a low-interest loan. The longer you put off repaying high-interest loans, the more difficult they’ll be to pay because of accrued interest and fees. If you’re unable to do so, again, your credit score may suffer, and you could find it more difficult to rebuild your credit.

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Reasons to avoid getting a title loan

Car title loans, like payday loans, are often a last resort for those who need money quickly or aren’t able to qualify for other types of loans. Like payday loans, auto title loans come with extremely high interest rates that end up costing borrowers much more than other kinds of loans.

Because title loans are often the only loans available to those with poor credit and immediate needs, the companies that offer them have no incentive to compete for business based on price.

They also come with various fees, and you may even have to apply for a new loan, such as a traditional car loan or personal loan, in order to pay off your auto title loan — which can be difficult if you have bad credit.

High interest rates

Interest rates on car title loans aren’t just high, they’re exorbitant. In most cases, the annual percentage rate (APR) — the yearly cost of borrowing, without taking compounding into account[4] — is higher than 300%.[3]

Compare that to an APR of 29% for a high-interest-rate credit card that might be offered to someone with poor credit.[5]

Car title loan interest rates are more in the neighborhood of payday loan interest rates, for which the average APR is 404%. This issue was so concerning to the Illinois state legislature that it passed a bill in January 2021 to cap rates on all consumer loans, including car title and payday loans, at 36%.[6] Several other states have passed similar measures in recent years to limit these kinds of loans, and some states prohibit them altogether.

Fees

As mentioned above, in addition to high interest rates, car title lenders may charge a range of fees including application, extension, and processing fees. In the case of extension fees, you could wind up paying hundreds of dollars just for the “right” to keep owing what you borrowed in the first place.

In one example, if you apply for a two-week extension or rollover of a $500 loan, it could cost you an additional $75.[1]

Paying toward interest, not the loan

Interest rates are so high on car title loans that you can end up paying the interest without paying down the loan itself. Then, when the loan comes due, you’ll have to pay the entire principal at once. This is called a balloon payment: a larger-than-usual one-time payment at the end of the loan term.[7]

Unless you’re prepared, the cost of a balloon payment can be prohibitive, putting your car and your credit at risk. One study found that 4 in 5 auto title loans are reborrowed on when they come due because borrowers can’t afford the balloon payment.[8]

Car repossession

If you take out a car title loan, the chances that you’ll wind up having your car repossessed are high. In fact, a study of 3.5 million auto title loans from nonbank lenders between 2010 and 2013 found that 1 in 5 borrowers had their vehicles seized.[8]

Your rights under the Military Lending Act

Active-duty Servicemembers, their spouses, and some dependents have rights concerning interest rates that members of the general public don’t. For instance, they can’t be charged more than a 36% military APR, including the costs of finance charges, fees, and add-on products.[9]

Vehicle title loans and payday loans are among the kinds of loans covered by these limits under the Military Lending Act, which was expanded in 2015 to explicitly include them. You also can’t be required to submit to mandatory arbitration or a prepayment penalty for paying off your loan early.[9]

The bottom line

If you think a car title lender has engaged in dishonest or deceptive practices, the Federal Trade Commission recommends contacting your state consumer protection office or attorney general. The FTC doesn’t resolve individual complaints, but if it finds a pattern of wrongdoing, it may investigate. You can make a complaint to the FTC at reportfraud.ftc.gov.

It’s possible to get out of a title loan without losing your car, but it can be difficult and costly. It can worsen your financial situation and make it more difficult to get out of debt.

Therefore, the best way to deal with auto title loans is to avoid them in the first place. You’ll often have to take out another loan to pay them off anyway, if you can qualify for one. If you can’t and aren’t able to find other ways to bring in money, you’ll face the prospect that your vehicle will be repossessed and you may have negative credit repercussions that stay on your credit record for years.

Look for other loan options instead, with reputable lenders and financial institutions (such as banks and credit unions) that offer reasonable loan payments at competitive rates.

Sources

  1. Federal Trade Commission. “What To Know About Payday and Car Title Loans,” https://www.consumer.ftc.gov/articles/what-know-about-payday-and-car-title-loans. Accessed July 19, 2019.
  2. Indeed.com. “How to Ask for a Salary Advance (With Example),” https://www.indeed.com/career-advice/pay-salary/how-to-ask-for-a-salary-advance. Accessed July 18, 2021.
  3. Financial Web. “4 Reasons to Avoid Auto Title Loans,” https://www.finweb.com/loans/4-reasons-to-avoid-auto-title-loans.html. Accessed July 18, 2021.
  4. Investopedia. “Annual Percentage Rate (APR),” https://www.investopedia.com/terms/a/apr.asp. Accessed July 19, 2021.
  5. Bankrate. “What is a good APR for a credit card?” https://www.bankrate.com/finance/credit-cards/good-apr-for-credit-card/. Accessed July 19, 2021.
  6. CNBC. “Payday loans can have interest rates over 600%—here’s the typical rate in every U.S. state,” https://www.cnbc.com/2021/02/16/map-shows-typical-payday-loan-rate-in-each-state.html. July 19, 2021.
  7. Consumer Financial Protection Bureau. “What is a balloon payment? When is one allowed?” https://www.consumerfinance.gov/ask-cfpb/what-is-a-balloon-payment-when-is-one-allowed-en-104/. Accessed July 19, 2021.
  8. Consumer Financial Protection Bureau. “Research finds one-in-five auto title loan borrowers have their vehicle seized.” https://www.consumerfinance.gov/about-us/blog/research-finds-one-five-auto-title-loan-borrowers-have-their-vehicle-seized/. Accessed July 19, 2021.
  9. Consumer Financial Protection Bureau. “What is the Military Lending Act and what are my rights?” https://files.consumerfinance.gov/f/documents/cfpb_military-lending-act-know-your-rights_handout.pdf. Accessed July 19, 2021.

About the Author

Lauren Bringle is an Accredited Financial Counselor® with Self Financial – a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.

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Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).

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Written on August 15, 2021
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