Title loans offer quick cash without a credit check. That can be tempting, but it can also be dangerous. Interest and fees are high and you could lose your car. These title loan loopholes could offer a way out.
How Do Title Loans Work?
A vehicle title loan is a short-term loan using a vehicle as collateral. These loans are available to anyone who has full ownership of a car, truck, or motorcycle. You don’t need a credit check or even a job making these loans an attractive option to people with bad credit who need money fast.
If you fail to pay a title loan your vehicle will be repossessed. The Consumer Financial Protection Bureau (CFPB) found that 20% of title loans end in repossession and over 80% are refinanced because the borrower couldn’t make the payment.
If you lose your vehicle, you could lose access to work, school, and necessary services. If you don’t lose your vehicle you will probably end up paying back much more than you borrowed. It’s almost impossible to win with a title loan.
Title Loan Loopholes Could Solve Your Problem
The federal government does not regulate title loans. Federal law only requires that the lender disclose the terms and cost of the loan in writing.
Some states ban title loans altogether, some regulate them, and some ignore them. Knowing your state’s laws on title loans may off you some protection against predatory lenders. Loopholes exist in several states. These loopholes may benefit the borrower or they may be used by lenders to avoid other state laws.
Does Your Loan Violate State Laws?
Some title lenders violate state laws. They assume that borrowers won’t check, and they’re usually right. If you review your loan carefully you may find that the loan terms are not in compliance with the law. You may not have to pay.
Here’s how to start.
- Review your loan contract carefully. Note the APR, the fees, the term, and any provisions on repossession or loan rollovers.
- Review your state’s laws carefully. Look for any discrepancy between the laws and the contract terms.
- Consider legal advice. You can check the U.S. Government’s legal aid page, the American Bar Association’s legal aid page, or free legal clinics in your area. Ask whether your loophole will stand up legally.
- Confront your lender. If your contract is voidable, you won’t have to pay and the lender cannot repossess your vehicle. Be sure that your contract is voidable before taking this step!
Even if your contract was legal you may be able to exploit other title loan loopholes.
Were You Mentally Incapacitated When You Signed Your Contract?
If you were under the influence of alcohol to the extent that your judgment was impaired when you signed the contract, you may have a way out. You will have to prove that you were incapacitated and that the lender’s representative knew it.
Were You Under Your State’s Legal Age of Consent?
If you signed the loan contract when you were below the age of consent – 18 in most states – the contract is void and not enforceable.
Did the Loan Violate the Military Lending Act
The Military Lending Act (MLA) is designed to protect active-duty service members from predatory lending practices. The MLA includes these provisions:
- You can’t be charged an APR over 36%, including interest and fees.
- Lenders can’t charge you a prepayment penalty if you pay a loan early.
- The interest rate on loans taken out before your military service is capped at 6%.
If you’re a service member and you believe that your rights under the MLA are being violated, consult your nearest Judge Advocate General’s Office.
Many title lenders will not lend to service members because of the MLA.
State Title Loan Laws
Six states have no cap on title loan interest rates, allowing APRs well into the triple-digit range. Title lenders are very active in these states.
Title loans are legal with some restrictions on the cost of the loan in these 10 states.
- New Hampshire
- New Mexico
- South Carolina
If you live in one of these states and have a title loan or are considering one, it’s important to know your state’s laws. There’s a good summary here but you should check your state’s rules in detail.
Look Out for These Rules
Pay particular attention to the rules on surplus or deficiency balance. If a lender repossesses your vehicle, they will sell it at auction. The amount it sells for may be more than the amount of the loan (surplus balance) or less than the amount of the loan (deficiency balance).
Some states allow lenders to keep a surplus balance, others require the lender to return the surplus to the borrower. Some states allow the lender to demand payment of any deficiency balance from the borrower.
These six states have some regulations on title loans, but with loopholes that lenders exploit to offer these loans:
- California (loans over $2,500 only to avoid rate cap on small loans)
- Florida (title lenders operate under consumer finance law, with additional fees)
- Kansas (structured as open-ended credit to avoid rate cap)
- Louisiana (loans over $350 and for terms of 2 months or more)
- Ohio (loans made under credit services organization or mortgage loan laws)
- South Carolina (loans above $600 only to avoid rate cap)
The other 28 states either prohibit title loans completely or apply restrictions that few title lenders are willing to meet. Title lenders typically do not operate in these states. Some borrowers in these states may source title loans online or by crossing state borders.
What Are Title Loans?
Title loans are short-term secured loans secured by the title to a vehicle. Loans are usually capped at 25% to 50% of the vehicle’s value.
These loans are based on your car’s value, not your ability to pay. They are available without a credit check and may not even require that you have an income.
Title loans usually have a term of 15 to 30 days. At the end of the term, the borrower must repay the loan principal, the interest, and the fees. Loans are usually capped at 25% to 50% of the vehicle’s value.
Title loans usually carry these requirements.
- You must own the vehicle outright or have only a small loan balance.
- There must be no other liens on the title
- The lender will need to inspect the vehicle.
- You’ll need identification and proof of auto insurance
- The lender will keep your car’s title until you pay the loan.
The lender may require you to surrender a duplicate set of keys. Some lenders also place GPS locators or starter interrupt devices on vehicles to make repossession easier.
Title Loan Interest Rates
Title loan interest rates are high, sometimes over 300% per year. Fees are often added to the interest. The interest and fees make these loans difficult to pay.
The lender will probably quote the interest rate as a percentage of the loan amount. The terms of these loans are very short, so the fee may seem affordable. If your financing cost is 25% of the loan for a 30-day loan, your APR is 25% x12, or 300%, which is very high.
Many title loan borrowers are unable to pay the loan on the due date. They are forced to roll the loan over into a new loan, with additional fees. That can trap you in a cycle of escalating debt.
Don’t Ignore or Avoid Your Lender
You won’t want to talk to your lender. Nobody does. You still need to. If you negotiate you can roll over your loan and buy time to come up with a solution. It’s expensive, but if you try to avoid the lender you will probably end up losing your vehicle.
Other Ways to Escape Your Title Loan
If none of those options works for you, consider these possibilities.
File For Bankruptcy
If you have no realistic way to pay your debts, bankruptcy is an option. It’s not ideal for dealing with a title loan, because bankruptcy won’t extinguish the lien on your vehicle and the lender can still repossess it. Bankruptcy also takes several months to complete.
Bankruptcy could discharge your other debts, leaving you more able to pay your title loan.
Sell Some Personal Belongings or Take On a Side Gig
Title loans usually have to be paid in full with a single payment after 30 days. If you’re short of cash and worried about rolling the loan over or losing your vehicle, consider selling items that you don’t really need.
It may be hard to let things go, but it could be a better choice than an unsustainable loan rollover or losing a vehicle you need to get to work. Once the title loan is off your back you can recover.
You may also be able to work more hours or take on a side hustle. That can be exhausting but for a short-term objective, it may be worth it. You may even discover a new business opportunity!
Apply for an Unsecured Personal Loan
If you can get a personal loan, it may be worth using it to pay off your title loan. Personal loans will have lower interest and longer terms, making the monthly payments much more affordable.
If your credit is seriously damaged it may be difficult to find a personal loan. Some lenders, like Upstart, One Main Financial, and Upgrade, specialize in lending to borrowers with impaired credit. You will pay a high interest rate, but it will still be much lower than the rate on a title loan.
Apply for a Payday Alternative Loan
Many credit unions and some local banks offer these loans, which are designed to help people avoid the payday loan trap. The amounts aren’t usually large, but you may be able to borrow enough to pay off your title loan.
Payday alternative loans can be paid back in several monthly installments, which makes them more affordable. Interest rates are usually moderate. Ask your bank or credit union if they offer payday alternative loans.
Use a Credit Card Cash Advance
Normally we’d discourage cash advances. The interest rate is high and they start accumulating interest as well. It’s still worth considering a cash advance if it’s the only way to escape a title loan.
Even the interest rate on a cash advance is far lower than the rate on a typical title loan, and you can pay the advance back in several installments.
Sell the Vehicle
It is difficult to sell a car with a lien on the title, but it may be possible. You will have to pay the loan off before the buyer can take possession of the vehicle.
If you are unable to pay your loan and face repossession, this may be a good option if you can find a buyer. This is especially true if the loan is well under the value of the car and your state allows the lender to retain a surplus balance. At least you’ll get something.
Refinance With a Traditional Car Loan or Title Loan Refinance Company
Many conventional car loan companies offer refinancing loans. These loans have more moderate interest rates and longer terms than title loans, making them more affordable. They are also difficult to get if you have bad credit or no credit. Some auto lenders do specialize in making loans to people with bad credit or no credit.
Some online title lenders also offer title loan refinancing. These are still title loans and the interest will be very high, but some do offer extended terms that can make the payments more affordable. Be careful and check the lender’s reputation.
Talk to a Professional
Relying on a title loan in the first place is a sign that you’re not in a good financial situation. If you can’t pay it, your situation is probably worse. You probably have bad credit or no credit and no easy access to cash.
You still have some options.
Debt Management Plan
Debt management plans are offered by nonprofit credit counseling agencies. These agencies usually offer a free initial consultation. A counselor will examine your situation and help you decide whether a debt management plan is the right choice for you.
A debt management plan is a form of debt consolidation that doesn’t involve a loan. You will make one monthly payment to the counseling agency. They will pay your creditors. They will also negotiate for better deals.
You will pay a fee. These plans require discipline and many people don’t complete them, but they can resolve a serious debt problem. Be sure the agency you select is legit. Check reviews and credentials before agreeing to a debt settlement plan!
Debt settlement is the process of negotiating to clear a debt for a payment lower than the original amount. You can do this yourself or retain a debt settlement company to do it for you.
Debt settlement companies are for-profit businesses that will charge you a percentage of the savings you gain from a settlement. Choose your company carefully and check its reputation: some companies are outright scams.
Title loans are difficult to settle because the lender has collateral. Seizing your car is more profitable than accepting a settlement. Debt settlement could still clear other debts and give you more resources to apply to your title loan.
The Bottom Line
Title loans are expensive and risky, and if you are considering one you should look for other alternatives. You could be trapped in a cycle of rolling over the loans and making multiple payments without ever reducing the loan principal. You could lose your vehicle as well.
If you have a title loan, you should try to clear it as soon as possible, even if it means taking on other debt. Any other loan (other than a payday loan, which you should also avoid) will have a lower interest rate.
Yes, you need insurance. The lender will not take the risk of the vehicle being stolen or wrecked during the loan term. If the car is lost or damaged the insurance company will pay the lender first.
Most title lenders will not do a credit check. No hard inquiry will appear on your credit report. Most will also not report payments, so there will be no impact on your credit score.
You cannot be arrested or imprisoned for failing to pay a loan. If the lender or a collection agency sues you, you could be jailed for contempt of court if you fail to appear or follow court instructions.
Most title lenders will not sue you or sell your account to a debt collector. They will simply repossess your vehicle.