When you’re in a financial pinch, a car title loan might sound like the right solution. This type of loan allows you to borrow money in exchange for your car title. But title loans tend to be expensive and keep you trapped in a cycle of debt, making them anything but a smooth ride.
However, there are ways to get rid of car title loans, and understanding how to do so can save you a lot of money and headache.
What is a car title loan?
A car title loan is a small loan, usually between $100 and $5,500, that’s secured by your vehicle.
The lender hands you a lump sum of money, and you turn over your car title and an extra set of keys as collateral. A typical car title loan has a triple-digit annual interest rate, requires payment within one month and is for much less than the value of the car.
If you don’t pay back the loan within the specified time frame, the lender can take 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
If you already have a car title loan, it’s probably costing you a lot of money. But there are ways to get out of this type of loan, whether you negotiate the terms 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.
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 indebted to a title lender.
Negotiate the loan terms
Instead of settling the debt, you could negotiate more affordable loan terms. Ask for a lower interest rate, a lower monthly payment, a longer loan term or a combination of all three. 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.
What happens if you don’t pay title loans?
You may choose to stop paying the title loan altogether, but consider the consequences of default.
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.
Refinancing a car title loan
Another option is to apply for a new, lower-cost loan and use the funds to pay off the title loan.
You’ll have to be sure you qualify for the new loan and check the loan terms to make sure it’s affordable. The new loan should come with a low fixed interest rate, lower monthly payments and enough time to repay the money.
Look at different banks and credit unions for an auto loan or a personal loan. Also check your credit cards to see if you can take out a cash advance. If you can’t find affordable terms, try asking a friend or family member to either co-sign the loan or lend you the money.
As long as the loan comes with better terms, it will be less expensive than constantly rolling your title loan over. And once you pay off the title loan, you’ll also get your title back.