What Happens If You Don’t Pay Your Title Loan?

A title loan functions as a secured loan, meaning it is backed by an asset. In this arrangement, individuals use their vehicle’s clear title as collateral to obtain funds. The lender places a lien on the vehicle’s title, temporarily holding it while the loan is active. Should the borrower fail to meet the agreed-upon repayment terms, this collateral arrangement allows the lender to take action to recover the outstanding debt.

Vehicle Repossession

Failing to make payments on a title loan can lead to vehicle repossession. In many jurisdictions, lenders possess the legal right to seize the vehicle without a prior court order once a default occurs. The process begins after a borrower misses a payment or violates the loan agreement terms.

While procedures vary by state, many require the lender to provide specific notices to the borrower. This might include a “right to cure” notice, offering a window for the borrower to catch up on overdue payments and fees to prevent repossession. Other notices, such as intent to repossess or sale notices, are commonly required before or after the vehicle is taken. These notices detail the borrower’s rights and the lender’s next steps.

Repossession is carried out by a third-party company hired by the lender. Agents can retrieve the vehicle from various locations, including the borrower’s home or workplace, provided they do so without breaching the peace. Some lenders may require GPS tracking devices, facilitating its location if payments cease.

After repossession, borrowers have a limited opportunity to reclaim their vehicle. One option is “redemption,” where the borrower pays the entire outstanding loan balance and all accumulated fees. This period is typically short, often 10 to 30 days from the date of repossession or notice of sale. Another option, “reinstatement,” allows the borrower to pay only past-due amounts and repossession-related fees to resume the original loan. Both options incur additional costs, such as towing fees ($50-$250), daily storage fees ($20-$50), and administrative charges, which can quickly accumulate to $500-$1,000 within the first week.

Remaining Financial Obligations

Even after repossession, a borrower’s financial obligations may continue. The lender typically sells the vehicle, often through a public or private auction, to recoup the outstanding loan amount. Proceeds are then applied to the borrower’s debt.

Often, the sale price of the repossessed vehicle does not cover the full amount owed on the loan, especially after additional expenses. This shortfall results in a “deficiency balance,” which is the difference between the outstanding loan amount, plus all repossession and sale-related costs, and the vehicle’s sale price.

Borrowers remain legally responsible for this deficiency balance in most states. Fees and costs added to the loan balance after default can be substantial. These include charges for towing, storage, preparing the vehicle for sale, and auction fees, which can be 10% to 15% of the vehicle’s sale price. Legal fees incurred by the lender may also be added to the deficiency. The lender may then pursue collection of this balance, potentially through a collection agency or legal action to obtain a judgment against the borrower.

Credit Score Implications

Defaulting on a title loan has lasting consequences for a borrower’s credit score and credit report. When a borrower defaults, the lender may report negative activity, including missed payments and repossession, to the major credit bureaus. Any deficiency balance that is sent to collections will also appear on the credit report.

These negative entries can significantly lower an individual’s credit score. A lower credit score makes it challenging to obtain new credit, such as credit cards, personal loans, or mortgages. It can also impact other aspects of financial life, including securing housing, employment, or insurance rates.

A repossession typically remains on a credit report for up to seven years from the original delinquency date. While some title lenders may not report regular payment activity, default and repossession are commonly reported, creating a derogatory mark on the credit history. This long-term impact on credit can impede financial progress and access to mainstream financial products.