How to get out of a title loan: 5 legal title loan loopholes

A car title loan is a secured small loan, usually for 25 to 50 percent of your vehicle’s value. These types of loans tend to be much more expensive than conventional personal loan options, even if it was the right solution when you borrowed it.

If you want to exit your title loan, there are ways to legally get out and, in turn, save yourself money and avoid a cycle of debt.

How to get out of a 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. You have other options if these aren’t possible, but they may be more damaging to your credit score.

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.

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 cannot repay.

You’ll have to be sure you qualify for competitive personal loan 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.

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. Depending on how your title loan is structured, you may be able to negotiate a more affordable monthly payment.

When you negotiate, request a lower interest rate, lower monthly payment, longer loan term or a combination. However, extending your term without reducing your interest rate could cost you more over the life of the loan. Ensure you can afford the new terms and get all the details in writing. Keeping your account in good standing at affordable terms will help you pay off the debt and keep your credit healthy.

Consider debt settlement

If you can’t afford the whole payoff amount, figure out what you can 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. It can be done yourself or with the help of a third-party company. Once you agree to an amount, get the details in writing and ensure both parties sign the document so the lender can’t demand more money later.

However, settling debt yourself or through a company does not come without risks. First and foremost, 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. Along with this, the process can take up to three or four years and tends to come with hefty fees, between 15 and 25 percent.

Declare Chapter 13 bankruptcy

You cannot discharge a secured debt in bankruptcy. However, restructuring it by declaring Chapter 13 bankruptcy can result in a longer pay-off period and potentially reduced rate.

With this type of filing, you create a repayment plan for all your debts, including your car title loan. Throughout the repayment period, usually three to five years, you will make your payments to a court-appointed trustee.

Bankruptcy also severely damages your credit and may remain on your report for up to seven years from the filing date.

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.

Why to avoid title loans

While the potential to receive a lump sum of cash when you are in a pinch is appealing, title loans can be expensive and risky. First and foremost, approval is available only to those who own the vehicle outright or who have a lot of equity. If there is a lien on the car, you likely cannot get a title loan.

Additionally, if you default on your loan, the lender could seize your car. That might put your employment at risk if you need a car to get to work.

The high costs of title loans also may outweigh the initial access to cash. Rates equivalent to 300 percent are not uncommon, according to Experian. Consider some alternatives to title loans that come with fewer risks.

• Payday alternative loans: A payday alternative loan, usually offered by credit unions, allows you to borrow anywhere from $200 to $1,000 for up to six months.
• Credit card cash advances: A credit card cash advance is a short-term loan that is borrowed directly against the limit on your credit card. However, this option tends to carry a higher interest rate than your typical credit card rate. Additionally, interest starts accruing immediately rather than after a grace period.

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.