How To Get Out of a Car Title Loan Without Losing Your Car

What Is a Car Title Loan?

A car title loan is a short-term secured loan that uses your vehicle's title as collateral.

Much like payday loans, car title loans are designed as a fast way to get cash for bills or emergencies. Because these loans are based on the vehicle’s value rather than your credit score, they are an appealing option if you have bad credit or no credit and need money quickly.

Title loans are quick to apply for and get. An applicant can usually simply drive to a store providing title loans and leave with the loan proceeds in 15 to 45 minutes. Rolling over a previous title loan into a new loan takes even less time.

Because of the often predatory lending practices of these types of loans, about half of all U.S. states prohibit them.

Who Qualifies for Car Title Loans?

To qualify for a car title loan, the borrower must either own the vehicle outright or owe very little on it. There also can't be any liens on the title. There is usually no credit check, but the title loan company must actually see the vehicle in person.

Borrowers must also show their photo ID, proof of auto insurance, and sometimes proof of income. After the new loan is approved, the lender keeps the vehicle's title until the loan, interest, and any document or processing fees are paid off.

What Are the Loan Terms Like?

In states that allow car title loans, the loans typically have a term of 30 days. At the end of the term, a single payment — called a balloon payment — of interest and principal is due. Repayment terms vary by state, though, and can range from as few as 15 days to over a year.

Depending on state regulations, the dollar amount of these loans usually ranges between $100 and $10,000. The loan amount is usually capped at 25% to 50% of the vehicle's value.

What's the Interest Rate for Title Loans?

Car title loans typically have very high-interest rates. Rates can be 25% or more. This interest rate isn’t the same as the annual percentage rate (APR).

Title loans have short terms, often only 15-30 days. So to get the APR, you have to multiply the interest rate over a year’s time. For example, for an $800 loan at 25% interest over a 30-day term, the APR would be 25% x 12 months = 300%. Unfortunately, this extraordinarily high APR is normal for title loans. If you can't repay a title loan before the loan term ends, the lender may let you roll the loan over into a new loan. This will add even more interest and fees to your balance and can lead to a cycle of debt.

Can Your Car Be Repossessed if You Don't Pay a Title Loan?

Yes. If you become unable to pay a car title loan according to the loan agreement, the lender has the right to repossess and sell your vehicle just like a bank would. State law determines your redemption rights prior to a sale, how and when the lender can sell your vehicle, and whether you can be pursued in court for any loan balance that is left over after the sale (known as a deficiency balance). State law also determines whether a lender must return any surplus money to you if your vehicle sells for more than you owe.

A car title loan can get expensive very quickly, especially if you have to keep rolling it over into a new loan. These loans can easily make it impossible to pay back what you owe, which increases your risk of losing your car to repossession. The Consumer Financial Protection Bureau found that 1 out of 5 title loan sequences (where the borrower has to roll over the loan into a new loan) results in vehicle repossession.

How To Get Out of an Auto Title Loan Without Losing Your Car

If at all possible, it’s best to avoid car title loans completely. If you find yourself in one, though, you can try the following things to legally get out of it:

• Pay off the loan. We discuss some creative ways to do this below.

• Apply for a personal loan or traditional auto loan.

• Renegotiate the terms with the lender.

• Seek help from an accredited credit counselor.

• Know your rights if you're a servicemember.

Pay Off the Loan

The best way to get out of a car title loan is to pay off the balance as quickly as possible. But this is easier said than done because being short on cash was the reason you took out the loan in the first place. Here are some ideas about how to get the money to pay off your title loan:

• Sell your personal property or valuables:

  You might consider selling some of your personal property or valuables to raise the necessary cash. You could use websites or social media to sell your property, or you could take the more traditional route and have a garage sale or yard sale.

• Get a credit card cash advance:

  Cash advances are usually pretty high in interest, and you’ll probably need to pay a cash advance fee of 5% on top of the interest. Even with these extra costs, a credit card cash advance will still be easier to handle than a car title loan.

• Ask a family member or employer for a loan:

  Finally, you could ask family or friends for financial help, or you could request a pay advance from your employer to pay off your title loan. If you do this, it's best to be clear about the terms of repayment to protect the relationship.

Apply for a Personal Loan or Traditional Auto Loan

You may also be able to apply for a personal unsecured loan or an auto loan from a traditional lender (like a bank or credit union) and use those borrowed funds to pay off the title loan.

If you have bad credit, you might want to consider applying through a small community bank or credit union. Eligibility requirements at smaller banks and credit unions are often more relaxed than they are at bigger financial institutions. You can also ask a family member with good credit to be a cosigner on the loan to help you get approved for the loan or to get a better interest rate or terms.

Many online lenders offer bank loans or peer-to-peer loans. Some online lending sites will tell you upfront if your credit score is high enough to qualify. Even if a personal loan or car loan has high interest, its APR and loan term will be easier to handle than a title loan. Plus, the monthly payments will probably be easier to budget for than a title loan’s payoff because the borrowing term (# of months or years you pay on the loan) is often longer with personal and car loans.

Apply for a Payday Alternative Loan (PAL)

Some federal credit unions offer payday alternative loans (PALs). These were created to provide an alternative to payday loans with dangerous terms. PALs are loans of $200 to $1,000 with terms between one and six months and a maximum interest rate of 28%. The borrower must be a member of the credit union for at least one month, and there are limits on how frequently a member can take out a PAL.

Negotiate With the Lender

If you can't pay off a title loan right away, you could try to renegotiate your loan terms with the lender. Your chances of success may be small with this type of lender, but it doesn't hurt to ask. If you can't pay off the full loan but can pay part of it, you could also try negotiating a debt settlement agreement.

Above all, don't ignore or avoid your lender if you've already missed payments and you’re in trouble. That will almost certainly lead to the repossession of your vehicle.

Seek Help from a Credit Counselor

If you can't adjust your terms or refinance your title loan, you can find a credit counselor and talk through your debt-relief options. Nonprofit credit counseling agencies employ counselors who may be able to negotiate with your lender (and any other creditors you might have) as part of a debt management plan (DMP) to help you with your overall financial situation.

Participating in a DMP shouldn’t have a direct impact on your credit score. But DMP participation may indirectly affect your score by reducing your available credit. In the long run, making regular payments that reduce your debt through a DMP should improve your credit.

If You're a Servicemember, Know Your Rights

Title lenders and other predatory lenders often target military servicemembers. If you're an active-duty servicemember, the Military Lending Act (MLA) offers special legal protections for you, your spouse, and certain dependents. The MLA restricts terms for vehicle title loans, payday loans, and other kinds of high-risk financing products.

For example, it prevents a lender from:

• Requiring access to your bank account

• Requiring you to pay your title loan by check

• Charging you more than 36% APR

• Requiring you to waive certain legal rights

• Requiring you to create a voluntary military allotment in order to get the loan

• Charging you a prepayment penalty

Creditors can refuse to give you a loan on the grounds that you are an active servicemember and the loan violates the MLA. If you already have a high-APR title loan, the MLA could render your loan void, meaning you get to keep the money without paying it back.

Importantly, the MLA does not cover credit that is secured by property being purchased, like a loan to buy a home, motor vehicle, or personal property like a home appliance.

Can Bankruptcy Erase Title Loans?

If you're overwhelmed by a car title loan, filing for bankruptcy may offer a way out. Bankruptcy is a legal process that helps people erase or restructure certain debts when they can't afford to pay them. Whether bankruptcy can help with your specific title loan depends on a few factors, including which type of bankruptcy you file: Chapter 7 or Chapter 13.

Chapter 7 and Title Loans

Chapter 7 bankruptcy, often called "liquidation bankruptcy," can eliminate many types of unsecured debt, such as credit card balances and medical bills. However, a car title loan is a secured debt because the loan is tied to your vehicle. This means the lender has the legal right to repossess your car if you don’t repay the loan.

That said, you will get the benefit the automatic stay once you file your bankruptcy case. The automatic stay immediately stops collection efforts, including repossession. This is only temporary, but if you plan to file bankruptcy anyway, it can buy you some much-needed time to figure out how to address the title loan.

In Chapter 7, you may be able to discharge your obligation to repay the loan, but you typically won’t get to keep the car unless you pay off the loan balance or reach an agreement with the title loan lender. Sometimes, people can negotiate a redemption to keep their car. This involves paying the lender the current market value of the vehicle in a lump sum, which is often less than the loan balance. Alternatively, you may be able to reaffirm the loan, meaning you agree to keep paying it under the same or modified terms.

Chapter 13 and Title Loans

Chapter 13 bankruptcy works differently. Instead of wiping out your debts quickly, it allows you to create a repayment plan to pay back what you owe over three to five years. One of the biggest benefits of Chapter 13 is that it can help you keep your car.

When you file for Chapter 13, an automatic stay goes into effect. This temporarily stops the lender from repossessing your vehicle, even if you’re behind on payments. Through the repayment plan, you may be able to pay off the loan balance over time, often at a lower interest rate. In some cases, you may also be able to reduce the amount you owe if the loan balance is higher than the car’s current value. This is known as a cramdown and can only be applied in Chapter 13.

Bankruptcy isn’t a quick fix, and it’s not the right choice for everyone. It involves court fees and attorney fees, especially for Chapter 13 cases. Be sure to weigh these costs against the benefits of erasing or restructuring your debts.

If you’re considering bankruptcy as a way to handle your title loan, it’s a good idea to consult a bankruptcy attorney. Many offer free consultations and can help you understand your options based on your specific circumstances.

Let's Summarize...

Car title loans are a way to get cash in a hurry using your vehicle as collateral. Car title loans are risky because their short loan terms and high APRs make them difficult to pay back. This increases your risk of repossession.

If you're in a title loan, you should try to pay it off if it’s at all possible. You can do this with an unsecured personal loan, a credit card cash advance, help from your family or employer, or refinancing. You can also try to negotiate with the lender or seek assistance from an accredited credit counseling agency or an attorney.