How to break free from a car title loan

John McConnell
John McConnell

I'm John McConnell, a nationally recognized Credit Expert and Specialist in Personal Finance. I help people repair their credit and learn to manage their finances. I'm currently with Pyramid Credit Repair and working in this field for over 12 years, and I'm passionate about helping people take control of their financial future. My work has been featured in media outlets like ABC News, Fox Business, and The Huffington Post.

How to break free from a car title loan

When you originally took out a car title loan, it may have seemed like the best option, but these types of loans are typically more costly than others. However, there are strategies you can use to eliminate your car title loan, save money, and prevent falling into a cycle of debt.

Can you explain what a car title loan is?

A car title loan is a type of loan that is secured by your vehicle and typically offers 25 to 50 percent of your vehicle’s value. The Federal Trade Commission (FTC) states that the finance fee for this loan is usually 25% of the loan amount each month. The loan does not have interest but the effective APR is about 300%.

To get a loan from the lender, you’ll need to give them your car title and an extra set of keys as collateral in exchange for a lump sum of money. It’s important to note that the lender will typically require you to have a title that is free of liens, indicating that you don’t currently have an active auto loan.

You must repay your loan within a period of 30 days. Failing to do so may result in the lender taking possession of your vehicle or rolling over the loan into a new one. However, doing so will add more fees and interest to your existing debt, leading to a costly cycle of borrowing.

What are some ways to exit a car title loan?

If you want to get rid of a car title loan, you’ll have to either discuss it with your existing lender or apply for a new loan that has more favorable conditions.

Pay off the loan

If you are unable to pay off the car title loan due to your financial situation, it can still help you break the cycle of borrowing. Begin by contacting the title loan lender and obtaining the payoff amount. Next, explore various options to secure the money needed to pay off the loan, including the following methods:

  • Consider starting a part-time job to earn additional income.
  • You can request a salary advance from your employer.
  • Try to get a loan from friends and family.
  • Take out a personal loan from a credit union or bank.
  • Sell any unnecessary items you own like furniture, appliances, or jewelry.

If you decide to borrow money from your employer or use your savings, make sure to plan your expenses wisely. The goal is to steer clear of costly and brief loans such as title loans in the future.

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Think about the possibility of settling your debts

If you are unable to pay the entire amount owed, determine how much you are able to pay as a lump sum. The lender may consider accepting a lower amount, particularly if you’ve already missed a few payments. This is known as a debt settlement. When you agree on an amount, obtain a written summary and ensure that both parties sign it to prevent the lender from asking for additional payments in the future.

Paying off your debt for less than the agreed amount may lower your credit score as the lender may report it as “settled.” This negative mark can stay on your credit report for up to seven years. However, you will no longer be in debt.

Is it possible to file for bankruptcy as a means of exiting a car title loan?

If you file for Chapter 7 bankruptcy, your title loan won’t be impacted as it only deals with unsecured debts. However, if you opt for Chapter 13 bankruptcy, your debts will be restructured in a way that makes them more manageable. This implies that a title loan can be included in the bankruptcy application, and you might be able to lower the total amount you owe.

Engage in negotiations for the terms of the loan

If you’re struggling to repay your debt, consider requesting your lender for more lenient loan terms instead of settling. You may be able to negotiate better terms by proving your financial hardship and inability to repay the current terms to your lender.

During negotiations, ask for a combination of a lower interest rate, a longer loan term, or a lower monthly payment. Ensure that you can handle the new terms and that you receive everything in writing. Maintaining your account in good standing and at affordable terms will assist you in paying off your debt while preserving your credit score.

If you decide to extend the duration of your title loan, you may have to pay additional fees and interest charges. Despite getting a more affordable monthly payment option, you might still end up with a higher overall payment amount by the end of the loan term.

Explore the option of refinancing through a personal loan

You can consider applying for a new loan with lower interest rates and using it to pay off your title loan. One option is to opt for a personal loan for bad credit. Since these loans are unsecured, you won’t have to worry about losing your vehicle if you are unable to repay the loan.

To save money, make sure you meet the requirements for competitive interest rates when getting a loan. Even loans for those with bad credit should have rates below 36 percent. Look for a new loan that offers a low fixed interest rate, lower monthly payments, and a long enough repayment period. If the loan has better terms than your current title loan, it will be cheaper than repeatedly rolling your title loan over.

What are the consequences of not paying off title loans?

If you miss any payments, the lender will report it to the credit bureaus, which can lower your credit score. If you still don’t pay, your debt might go to collections, and both of these negative marks can stay on your credit reports for as long as seven years.

If you fail to repay your car loan, the lender may take your vehicle back. Certain lenders may even mandate the installation of a GPS device on the car at the time of the loan. If you conceal the car after defaulting, the lender can use the GPS to find it, and you will be charged an additional fee. This can further reduce your available funds, harm your credit score, and leave you without a means of transportation.

consequences of not paying off car title loan leading to repossession Build Credit with Confidence © Pyramid Credit Repair

If a lender is planning to repossess your car, they are required to give you notice beforehand in most states. If you receive this notice, it’s important to contact the lender right away. You can then attempt to negotiate with them or refinance your loan.

The bottom line

If you took out a title loan because it was your only option at the time, don’t worry. There are ways to get out of it. You can try to negotiate with your lender or look for a bad credit personal loan. This will help you avoid fees, pay less interest, and keep your vehicle from being repossessed. Make sure to keep up with your payments, even if that means making sacrifices in other parts of your budget until you are out of debt.