Key takeaways
- There are ways to get out of a car title loan, including paying off the loan in full, negotiating with the lender or refinancing with a lower-cost loan.
- Defaulting on a car title loan can have serious consequences, including repossession of your vehicle and damage to your credit score.
- It is important to carefully consider all options and budget carefully to avoid getting trapped in a cycle of debt with car title loans.
Not everyone has the funds to pay off a car title loan in full, but there are still 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 and help you avoid a cycle of debt.
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 they risk damaging your credit score.
1. Pay off the loan
Depending on your 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. Ensure that you check for any fees or penalties associated with early payoff or loan satisfaction recording.
Next, decide where you can get the funds to repay the loan. Consider using these methods:
- Borrow money from friends or family.
- Tap into assets that have cash value, such as stocks, life insurance or retirement accounts. Be aware that retirement accounts have early withdrawal tax penalties. If possible, consider turning the withdrawal into a loan if you are confident you can repay it on time.
- Create a budget that helps you rein in spending and speed up debt repayment. Review all your bills and credit card accounts to assess what you can live without, and especially check automatic withdrawals to your bank account.
- Start a side gig to earn extra money or sell a valuable item that you won’t miss.
- Ask for a salary advance from your employer. Or consider using a cash advance app, which can provide funds that you repay with a future paycheck. Cash advance apps typically charge lower fees than traditional payday loans, but there are still costs involved.
Keep in mind:
If you do receive an advance from your employer or tap into your savings, be sure to budget carefully. Ultimately, you want to avoid taking on expensive, short-term debt like title loans in the future.
2. Borrow 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. However, you still risk being pursued by debt collectors if you fail to pay.
Qualifying for competitive personal loan interest rates can be hard with a low credit score. Even so, bad credit loan rates can be under 36%. The new loan should come with a lower fixed interest rate, lower monthly payments and more time to repay. As long as the loan comes with better terms, it will be less expensive than constantly rolling over your title loan.
Check with your bank or credit union to see what personal loans you qualify for, the rates and repayment periods.
Why you shouldn’t roll over a title loan
“If you can’t pay back the loan when it’s due, it’s rolled over into another cycle with more fees,” says Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling. “It creates a very difficult situation for people who are already struggling to repay. It is the exact definition of the cycle of debt.”
Read on
3. Renegotiate the loan terms
Your lender may be willing to negotiate if you can show financial need and your inability to repay the current terms. You may be able to negotiate a more affordable monthly payment. For instance, lengthening repayment terms can lower the payment amount, but be aware that cars depreciate in value. You don’t want to owe more than the car is worth.
When you negotiate, request a lower interest rate, lower monthly payment, longer loan term or a combination of the three. 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.
4. Look into the Military Lending Act
The Military Lending Act is a measure that was adopted in 2006 and is designed to protect members of the military who are on active duty, as well as their spouses and dependents, from predatory lending practices. The MLA includes protections like capping interest rates on loans at 36% and prohibiting prepayment penalties on loans. The act and its protections apply to vehicle title loans.
If you feel a loan violates the MLA, try contacting your local Judge Advocate General’s (JAG) office as a first step. Your local JAG can provide more information about your rights. If you’re not sure how to locate the nearest JAG office, try using the JAG Legal Assistance Office locator.
5. Sell your car to avoid default
If you have investigated all other options available and risk defaulting on the loan, consider selling your car and using the proceeds to repay the debt. This works best if you owe less on your car loan than the vehicle’s current market value. If you’re considering this option, first reach out to your lender to find out what the exact payoff amount is for the loan. As always, check to see if there prepayment penalties or other types of fees.
6. Request 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 independently or with the help of a third-party debt settlement 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.
7. Consider Chapter 13 bankruptcy
You cannot discharge a secured debt in bankruptcy, but restructuring it through a Chapter 13 bankruptcy can result in a longer repayment period at a 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. Keep in mind that bankruptcy also severely damages your credit and may remain on your report for up to seven years from the filing date. As a result, this option should be a last resort. If you decide to pursue this route, ensure that you find a qualified bankruptcy attorney.
Chapter 7 bankruptcy
Chapter 7 bankruptcy is designed for unsecured debts, such as personal loans and medical debt, so car title loans are generally not eligible. Despite this, many states allow you to protect your car and avoid vehicle repossession by leveraging bankruptcy code exemptions.
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 loopholes and workarounds. 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.
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