Title Loan Default: Consequences and What to Expect
Approximately 1.7 million consumers take out title loans each year according to a joint 2013 report by the Center for Responsible Lending and the Consumer Federation of America. A borrower typically ends up paying interest in excess of $2,100 on an average loan of about $950. If you're down on your luck and desperate for cash, you might decide that a title loan is your only option. But if you can't repay the loan, the lender can take ownership of your car.
If You Miss Your Payment Date
Title loans involve turning over the title to your vehicle in exchange for cash. Because the lender has your title, it effectively owns your car until you pay the loan off and take the title back. Many require you give them a duplicate set of your car keys so they can collect the vehicle in the event of default. Some lenders require you install a GPS device on your car – often at your expense – so the lender always knows where the vehicle is. A title loan lender may insist on installing a starter interrupt device. If you don't pay on the loan's due date, you'll turn your key in the ignition and nothing will happen -- you're not going anywhere until the lender gets its money.
Rolling Over the Loan
If you don't have enough money to pay back all you owe, the lender may offer to roll the loan over for you. This can have a snowball effect. If you owe $1,000 at the end of 30 days, including interest, and you only have $500, you can give the title loan lender $500 and he'll let you pay the other $500 next month. But more interest accrues on that outstanding balance, so you'll owe $500 plus more exorbitant interest.
The Threat of Repossession
Repossession is typically a lender's only option if you default on a title loan. According to the Center for Responsible Lending, it can take the car and sell it to recoup its money, but it can't sue you for the debt. State laws for repossessions vary, but it's possible in some states for a person to get the car back if he can settle the loan. When the car is sold, the lender might even charge you repossession fees on top of the original debt and interest.
Tip
Some states require a lender return to you any money over and above the amount of your debt if it sells your car. If it sells for $6,000 and your loan, interest and fees add up to $5,500, you’ll get $500 back, but this isn't the case in all states.
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