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

If you want to exit your car title loan, there are ways to legally get out. In turn, you can save yourself money and avoid falling into a cycle of debt. Not everyone has the funds to pay off a loan in full, but you still have ways to get out of debt faster. Finding a strategy that will work for your finances could save you hundreds, if not thousands of dollars down the line.

How to get out of a title loan

When you want to get out of a title loan, you can negotiate with your current lender or take out a new, more affordable loan. You have other options if these aren’t possible, but you could risk damage 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.

Next, you must 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 bad credit personal loan to refinance a title loan. Because they are unsecured, you won’t risk losing your car if you cannot repay them.

Qualifying for competitive personal loan interest rates can be difficult with a low credit score. Even so, bad credit loan rates can be under 36 percent. The new loan should come with a low fixed interest rate, lower monthly payments and more time to repay. But as long as the loan comes with better terms, it will be less expensive than constantly rolling over your title loan.

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 of the three. 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 on 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, your lender may be willing to accept a lower amount, especially if you’ve already missed several payments. This method is called debt settlement, and 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, negotiating debt 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,” remaining on your credit reports for up to seven years. Additionally, the process can take up to three or four years and tends to come with hefty fees — between 15 and 25 percent of the debt settled.

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

Chapter 7 Bankruptcy is for unsecured debts

Car title loans are generally not eligible for Chapter 7 bankruptcy. Chapter 7 bankruptcy is designed for unsecured debts, like personal loans and medical debts, so a car title loan is typically not eligible.

Many states, however, allow you to protect your car and avoid vehicle repossession by leveraging bankruptcy code exemptions. These vary based on your state, but you can generally file for Chapter 7 and keep your vehicle if your lender agrees to “redemption,” where you pay off the lender, or a “reaffirmation,” where you adjust the loan terms. To see if this is an option for you, check your state’s bankruptcy laws.

What happens if you don’t pay title loans?

If you fail to meet your payment obligations, 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 to get you out of the car loan. Some lenders require that borrowers install a GPS device on the car when they take out the loan. That means 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 you should avoid title loans

While it can be appealing to receive a lump sum of cash in a pinch, 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. The Federal Trade Commission warns that rates equivalent to 300 percent are not uncommon. 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.

Bottom line

A title loan may have been your only option when you borrowed, but that doesn’t mean you have to be stuck with it forever, thanks to these title loan work arounds. Negotiating with your lender or searching for a bad credit personal loan may help you avoid fees, pay less in interest and prevent repossession. Just remember, 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.