What to Do When You Can No Longer Pay for a Car Title Loan?

Unlike regular car loans, car title loans do not provide financing for a vehicle but give a consumer cash to use for other purposes. However, a creditor who holds a title loan has the same rights as he would with a vehicle loan. If a consumer fails to make payments, a bank may seize the vehicle.

The Legal Aspect

When a consumer obtains a car title loan, he signs a contract which states that a creditor may repossess the collateral if a consumer defaults on the loan. The lender may seize the vehicle without giving any notice to the borrower. However, many lenders may allow consumers to catch up on loan payments before starting the repossession process. It costs the bank additional money to tow, store and sell the vehicle.

Negotiating With Lender

A lender may be willing to negotiate the payment arrangements if you contact them promptly. If your financial problems are temporary, you may negotiate a temporary reduction of a monthly payment. The creditor may also postpone one or two monthly payments. If you have been laid off, you can ask the bank to refinance the car title loan to reduce the monthly payments. Request that any changes to your loan are done in writing and you receive a letter or a copy of the new loan contract.

Selling the Vehicle

If your creditor is not willing to negotiate the payment terms, you can try selling your car and paying off the title loan. Depending on how new the vehicle is and how long you have been paying on it, you may or may not sell it for the same amount that you owe to the bank. If you are "upside down" on the title loan, you will have a leftover balance. You are responsible for repayment of any balance left after the bank applies the sale proceeds. A bank may be able to add the balance to a car loan if you finance another vehicle or set up a personal loan for the remaining balance.

Voluntary Repossession

When everything else fails, you may turn in your vehicle to the bank. This is called "voluntary repossession." By doing this, you will reduce the creditor's repossession costs which you will be responsible for repaying. The bank will sell the vehicle and apply the proceeds to the title loan balance. You will have to repay any remaining balance and any costs incurred during the sale process. Even with voluntary repossession, a creditor may still report late payments and repossession to the credit bureaus. This negative information may prevent you from obtaining an auto loan in the future.