It’s no surprise that many people are confused over what might happen when you stop paying a title loan: there’s plenty of misinformation on this subject. On the one hand, debt collection agencies like to scare their targets with tales of everyone from the police to Batman coming to arrest them; on the other, the credit industry is often the target of scams of all types.
The short answer is that you can’t be imprisoned for failing to pay a debt like a credit card balance or a loan on your vehicle. The other consequences, however, can be severe, including the interest ballooning the amount you need to pay back to unmanageable proportions.
Disclaimer: The internet is an excellent source for cookie recipes and pictures of cute animals; reliable legal advice, not so much. If you’re concerned about your exact obligations and liabilities under the terms of a title loan, you should really be talking to a lawyer in your state who understands your circumstances.
The Basics of Car Title Loans
Pawning your car could be your best option when you need money quickly and can’t find any better options, such as a personal loan. Effectively, you sign over ownership of your vehicle to a lender, but you’re still allowed to drive it. These loans are available even to people with low credit scores as long as they earn a salary of more than $1,000, and can run for periods between a few weeks and several months.
The main drawback of borrowing money this way is that losing your job can easily lead to the lender taking possession of your vehicle, even if the outstanding sum of the loan is much less than its value.
What Happens If I Don’t Pay My Title Loan?
Pretty generally, a default (being unable to make the monthly payments) means losing your car unless you pay even higher fees to roll over the loan for another month. Depending on state laws, repossession can take place immediately or after a short grace period.
Of course, the lender or collection agency will do all they can to get their money from you rather than having to find a buyer for the car themselves. There are limits to what they can tell you, however.
The somewhat ironic situation is that lenders are allowed to issue a car title loan even without making sure that the borrower will be able to pay it back, which works against the consumer. At the same time, federal and state law tends to favor the consumer when they’re unable to keep up with a title loan. Physical threats, for instance, are illegal. On the other hand, the owner of a title pawn may be allowed to enter your property if that’s the only way to get to your vehicle, without it being considered as trespassing.
You can, in other words, safely ignore any collection agency that tells you they’ll put you in jail for being unable to pay off a car title loan, or who tries to sue you for a sum of money instead of the vehicle itself. They, as the owners of the auto title, may recover the car that serves as collateral, but this is all the title loan agreement allows them to do. If they overstep their authority, particularly in a state where lenders and collection agencies need a license to operate, you can get them to back off by reporting them to the authorities.
The only exception to this is if you did something which is indeed a crime. If, for instance, you claimed that you own your car outright despite having an auto loan outstanding, you could be charged with fraud by deception. Collection agencies like to use terms like these to intimidate debtors, but the decision of whether or not to prosecute lies with the state, not them.
How Can I Get Out of Paying My Title Loan?
If you really can’t make the payments anymore, the simplest way to cancel a pawn loan on your car is simply to drive it to the lender, hand them the keys and make sure to get a receipt. This fulfills all your legal obligations, and they have no choice but to take it, however much they might grumble. This will prevent your outstanding balance from becoming worth more than the car itself.
Apart from this drastic step, you can also look into title pawn rescue companies. If you can reach an agreement with one of these, they will pay off the original lender and let you refinance the loan with them.
If you are truly deep in the hole, you can also consider filing for bankruptcy. This is the last resort, however, and will probably mean losing the car anyway.
Other Consequences of Defaulting on a Car Title Loan
You may feel relieved at learning that being unable to find the money for payments doesn’t make you a criminal. Still, it’s far better to meet your obligations (or not take out a title loan, to begin with). Keep the following in mind:
Unpaid Loans and Your Credit Score
It’s usually better, however painful it might be, to accept the loss of your vehicle rather than get suckered or bullied into refinancing your title loan at a punitive interest rate. If you do neither of these things, the default will probably be reported to credit bureaus and affect your ability to borrow money for years to come.
Can My Wages Be Garnished If I Fall Behind on Title Loans?
Title loan companies like TitleMax often threaten debtors with court judgments forcing their employers to pay a portion of your earnings directly to your creditors. The process of actually getting such a judgment is complicated, though, so they’d much prefer not to. Whether or not they actually can depend on the contract you signed and the law in your state. This can only apply if the vehicle is less worth than the amount you owe, for example, after an accident.
The Dangers of Title Loans
Though the idea of getting instant cash even with bad credit is alluring, you should really think long and hard before pawning your car at a ridiculous interest rate. It’s tough making good financial decisions when the pressure is on, but this is when you need to keep a cool head. Short-term credit like payday and title loans can indeed be useful tools, but they turn into debt traps for far too many people.
Have you ever had to deal with someone trying to collect on an overdue title loan? We’d love to hear your stories, so please share in the comments.