The appeal of quick and easy cash from a title loan is undeniable. Almost anyone with a vehicle will qualify for a title loan, and you often get the cash instantly or within a few short days. A title loan can seem like a quick fix to a tough problem. Unfortunately, they also are a very short term fix. Before long, they become a problem of their own. Their high interest rates and disproportionately high monthly payments make title loans difficult to keep up. In fact, one study by the Consumer Financial Protection Bureau finds that over 20% of title loans end in default. So how big of a deal is this? What are the consequences of not paying back your title loan?
Losing Your Vehicle
Perhaps the most obvious consequence of defaulting on your title loan is the loss of your vehicle. After all, that is the underlying concept of the loan. However, what may not be as obvious is the value trade-off that you’re making. Most title loan lenders will limit your loan amount to roughly half of the value of the vehicle, with the average loan amounting to about $850. If you end up defaulting on an $850 loan and have your $3,000 vehicle repossessed, you’ve just given up over $2,000 in value.
The other important thing to consider is the loss in practical value. Especially if the repossessed vehicle was your only mode of transportation, defaulting on your title loan could very well make it difficult to get to work or school, as well as run every day errands. Indeed, if you miss enough days at work, losing your vehicle could cost you your job.
On top of losing your vehicle, title loan companies will typically charge you several hundred dollars in repossession fees. These fees can easily amount to a large portion of the defaulted amount, leaving you on the hook for almost as much now as before defaulting on the loan. And if you’re wondering how the lender can get away with charging these fees, they were likely buried somewhere in the loan application. So even though you’re defaulting on the loan itself and are unlikely to be able to pay the repossession fees, the lender can hold these over your head until you do come through.
Damage to Credit
Presumably if you turned to title loans in the first place, your credit wasn’t stellar. Defaulting on your title loan, however, will do even more harm, placing a fresh default mark. If you’re trying to rebuild your credit, this really matters, especially since more recent activity carries more weight on your credit.
Rolling into a New Title Loan Isn’t Much Better
If you can’t pay back your title loan, one alternative to defaulting on your loan is to simply take out a new title loan. Many title lenders are very happy to continue writing new loans as the old ones come to an end as long as they keep making 300% APR on your loan. However, while this probably is better than losing your only mode of transport and your largest asset, slipping down this debt cycle can cost you dearly in interest and fees, robbing you of money that you could be using instead to take care of other needs or to start building emergency savings. You may reach the point where enough is enough, and you’re willing to escape title loans at any cost.
Turning Your Vehicle In
Instead of waiting for your vehicle to be repossessed (either because you aren’t able or are unwilling to roll into a new title loan), consider voluntarily turning your vehicle in to the title lender. Many lenders will close out your loan as paid if you turn your vehicle in, leaving you off the hook from repossession charges and from negative marks on your credit. This is almost certainly a better alternative to having your vehicle forcibly repossessed, and depending on your circumstances, may be the best way out of the title loan cycle.
Once You’re Out, Don’t Go Back!
Whether you escape the title loan trap by defaulting, turning your vehicle in, or by finally paying off your loan, hopefully you are able to stay away from these loans for good. Of course, life will continue to throw you surprises. Whether it’s a job loss, medical bills, car repair or something else, you’ll likely find yourself needing quick cash again in the future. But that doesn’t mean you have to be unprepared. Take steps to rebuild your credit so you qualify for more conventional loans the next time you need help. Also build an emergency fund to cover some of life’s smaller surprises, keeping you from having to take out a loan quite as fast. If these fall through, turn to friends and family or to local non-profits. Although these avenues may require some guts, the long term impact will be far better than the damage that another title loan will have on your finances.