What Happens if You Default on a Title Loan?
Life happens, and your financial situation can change in a flash. If you took out a loan against your car and you’re struggling to make payments, you may be wondering what happens if you default on a title loan.
The answer is not as cut and dry as you think, as different factors can impact the outcome of this situation, including title loan repossession laws, the lender you work with, and your willingness to explore title loan loopholes.
Getting into the nitty-gritty of title loans includes exploring what happens if they become challenging, but keep in mind that you may have options to explore if a life-changing event happens and you need help to get your finances back on track.
Loan Default and Title Loan Repossession Laws
Loan default occurs after a borrower has failed to make payment(s) on their loan, sometimes if the payment is 30 to 90 days late. The exact definition of default, including the number of missed days or payments, is legally defined within the contract signed by the borrower and the lender. Once the loan officially enters default, the lender gains the legal right to take certain actions, most notably repossessing the vehicle that was used as collateral for the title loan. This is because a title loan is a secured loan, meaning the borrower surrenders the car’s title as security until the debt is fully repaid.
If a borrower stops making payments on their loan, the next steps that happen will often depend on the following:
- The borrower’s state of residence
- The terms and conditions of the loan agreement
- The borrower’s active communication with the lender
The individual’s state of residence matters because the laws surrounding vehicle repossession can impact the lender’s actions and the borrower’s rights.
Retrieving Belongings
The borrower may be entitled to retrieve their belongings from the vehicle before the vehicle is typically sold to pay off the remainder of the loan balance. Through some applicable state laws, lenders are often required to notify the borrower about these items and provide a reasonable method and timeframe for their return. Failure to do so could lead to legal action against the lender.
Right to Cure Notice
In certain states, like Kansas and Iowa, the law mandates that even after a vehicle has been repossessed, the borrower maintains the right to “cure the default” or “redeem” the vehicle by paying the total outstanding debt, including repossession fees, within a specified time frame. Depending on the state, they may be entitled to a “right to cure” notice, which needs to be sent to the borrower within a specific timeframe. The notice will cover the total amount that needs to be paid to get the vehicle back, including any storage fees, as some lenders will keep the vehicle in a storage yard until it is retrieved or sold.
Sale of the Vehicle
Beyond the immediate repossession, state laws also govern the subsequent sale of the vehicle. Some states ask the sale to be conducted in a “commercially reasonable” manner, which means the lender must make a good-faith effort to get the best possible price for the vehicle. After the sale, the proceeds are used to pay off the loan balance and the costs associated with the repossession and sale. If the sale price exceeds the debt, the borrower is entitled to receive the surplus.
If the sale proceeds are less than the outstanding debt, the lender may, in many states, pursue the borrower for the “deficiency balance.” However, some states, in an effort to protect consumers, prohibit lenders from collecting a deficiency balance on certain types of loans, including some title loans. Therefore, understanding the specific laws of the state where the loan was issued is the single most critical factor in determining a borrower’s recourse and liability after defaulting on a title loan.
Loan Terms and Communication
In some cases, the number of missed payments and the timeframe of repossession will depend on the terms and conditions of the loan, along with the relevant repossession laws in the applicable state. Before you sign a loan agreement, it’s important to review the terms and conditions of the loan, so you fully understand:
- The Loan’s Interest Rate and Repayment Period
- The Monthly Payment or the Number of Payments
- Terms Impacting Potential Loan Default, Potential Fees, etc.
If you are struggling to pay back a loan, staying in communication with the lender is imperative. Some title lenders could be willing to work with you to explore options to get back on track. Those options could include anything from refinancing to loan modifications and payment extensions to prevent title loan repossession.
Can You Go To Jail For Not Paying a Title Loan?
You may face repossession and other issues for not paying a title loan, but you won’t be facing jail time for loan default. However, if you fail to make the required payments to keep your loan in good standing, the title lender legally has the right to seize the vehicle because it was used as collateral for the loan.
How Late Can You Be On a Title Loan Before They Take Your Car?
As mentioned above, the number of payments you can miss before the lender takes your car will depend on the terms of your loan agreement, and in some cases, your state of residence. The lender may be allowed to take your car after the first missed payment in some cases, which is why it is important to stay on top of your payment obligations. Financial experts recommend not taking out a title loan that you can’t afford, because the repayment process will be challenging for you. If you do need to refinance your loan, you may be able to do so with your existing lender, or with a new lender, depending on your situation.5
Does Defaulting On a Title Loan Affect Your Credit?
In some cases, yes, defaulting on a title loan can affect your credit. But, this scenario will only happen if your title lender is reporting the payment behavior to the major credit bureaus, such as Experian, TransUnion, and Equifax.
When a lender reports the negative behavior (missed payment, loan default, etc.), it can significantly damage your credit score, making it harder and more expensive to obtain credit in the future, because having a higher credit risk due to a damaged credit score often leads to higher interest rates.
Furthermore, even if the initial default is not reported, the lender may eventually sell the defaulted debt to a third-party debt collection agency. Collection accounts are almost always reported to the credit bureaus and will severely negatively impact your credit profile. Therefore, while a title loan default might not immediately affect your credit, it carries a substantial risk of doing so, either directly by the lender or indirectly through a collections agency.
How To Pay Off a Title Loan Quickly
If you are worried about defaulting on a title loan, learning how to pay off a title loan quickly is your best bet to keeping your loan in good standing until the end of the loan term.
Start this process by reading through the loan agreement to understand the full payoff amount, including the principal balance, interest accrued to date, and any fees for paying the loan early, which are called prepayment penalties (not all title lenders have these types of fees).3 Creating a strict budget that drastically cuts non-essential spending can free up extra cash to put toward the loan principal, which is the original amount that you took out. Consider temporarily taking on extra work, such as a side hustle or selling unneeded possessions, to generate a lump sum payment to put towards your debt.
If a quick payoff isn’t immediately possible, you should maintain open communication with your lender. Many lenders are willing to work with borrowers who proactively reach out before a default occurs. They may offer a loan extension, a refinancing option with more manageable terms, or a modified payment plan. Ignoring the situation is the worst possible action, as it leaves the lender with no choice but to pursue the legal remedies outlined in your contract, which invariably involve repossession. Keeping your loan in good standing not only protects your credit score if the payment behavior is reported, but also ensures you retain ownership of your vehicle.
List Of Companies That Pay Off Title Loans
Are you worried about what will happen if you default on a title loan? Searching for companies that pay off title loans is another way to deal with your debt. While you can’t directly initiate a title loan buyout, you can refinance your existing loan with a new lender in order to get different loan terms and a new repayment schedule. When you refinance your title loan, the lender may pay off your existing balance for you, and you will get a new loan agreement to sign.
Some of the companies that help with title loan refinances include loan servicers like LoanMart, as well as title lenders like TitleMax. In other cases, you can use a personal loan to pay off a title loan balance and consolidate your debt.
Where to Find Title Loan Buyouts Near Me
As mentioned previously, initiating a title loan buyout yourself isn’t an option because it’s a business transaction that the consumer isn’t a part of, but that doesn’t mean you are out of options if you are unhappy with your current title loan. You may be able to refinance your title loan with a new or existing lender!5
If you have questions about your options, Max CashⓇ is here to help. Call one of our helpful loan agents today at 833-207-9052 or visit our title loan page to get started!5
