What Happens If You Don’t Pay a Title Loan?
Learn the comprehensive financial and logistical outcomes when a title loan agreement is not fulfilled.
A title loan is a type of secured loan where individuals use their vehicle’s clear title as collateral to borrow money. These loans are often sought by those needing quick funds without traditional credit checks. This article explains the consequences of defaulting on a title loan.
Understanding Title Loan Agreements
When entering a title loan agreement, a borrower surrenders their vehicle title to the lender, who then places a lien on it. This means the lender legally holds an interest in the vehicle until the loan is fully repaid. Loan amounts typically range from 25% to 50% of the vehicle’s value.
Title loans have short repayment periods, often 15 to 30 days, though some terms can extend up to 48 months. Interest rates are notably high, with annual percentage rates (APRs) commonly ranging from 25% to over 300%. These elevated rates contribute to the difficulty in repayment. The agreement grants the lender the right to repossess the vehicle if the borrower fails to repay the loan.
Financial Ramifications of Missed Payments
When a payment is missed on a title loan, immediate financial consequences begin. Lenders often impose late fees, which can be a fixed amount, such as $30, or a percentage of the unpaid portion, often around 5%. Beyond late fees, additional interest accrues on the outstanding balance, causing the total loan amount to increase rapidly. This can lead to the loan balance becoming significantly larger than the original sum, especially if the loan is rolled over into a new term, incurring more fees.
While many title lenders do not conduct credit checks or report regular payments to major credit bureaus, a default can still negatively impact a borrower’s credit score. If the account goes to a debt collection agency, or if a deficiency balance is pursued through legal action, this activity can be reported, significantly harming the borrower’s credit history for several years. Lenders initiate communication with the borrower through calls and notices once a payment is missed. Engaging with the lender during this stage can sometimes lead to options like payment extensions or refinancing to avoid repossession.
The Vehicle Repossession Process
Once a title loan is in default, the lender has the right to repossess the vehicle without needing a court order, as this right is established within the loan agreement. Repossession agents take possession of the vehicle. These agents must adhere to regulations prohibiting “breach of peace,” meaning they cannot use force, threats, or intimidation during the repossession. Repossession can occur swiftly, as agents may track the vehicle’s location.
Notice requirements before or after repossession vary by jurisdiction. While most jurisdictions do not require lenders to provide notice before repossessing a vehicle, some may mandate a written notice prior, outlining the amount due and the impending action. Many jurisdictions also provide borrowers with a “right to cure” the default, allowing them to pay the overdue amount and any associated fees to prevent repossession. Following repossession, lenders are required to provide the borrower with a written notice about the sale of the vehicle and the borrower’s rights to redeem or reinstate the loan.
Post-Repossession Procedures
After a vehicle is repossessed due to a defaulted title loan, the lender sells the vehicle, often at a public auction, to recover the outstanding loan amount. Proceeds from this sale are applied first to repossession costs, such as towing and storage fees, then to the remaining loan balance and accrued interest. If the sale price does not cover the full amount owed, a “deficiency balance” occurs.
The borrower may still be liable for this remaining deficiency balance. Lenders can pursue legal action, such as filing a lawsuit, to collect this debt. If a court rules in favor of the lender, a deficiency judgment can be issued, granting methods to collect money, including wage garnishment, placing liens on other property, or drawing from bank accounts. A deficiency judgment significantly impacts the borrower’s financial standing and credit score, often remaining on credit reports for up to seven years, making it harder to obtain future loans or credit.