What Happens When You Default on a Title Loan?
Many people live paycheck to paycheck, and title loans are an increasingly popular way of making ends meet. Nearly everyone needs a car for work, and if you possess a title for that vehicle, that ownership empowers you to take out secured and relatively small loans. But what happens when you cannot pay back the money borrowed in time and therefore default on the loan?
Laws Governing Title Loans Differ from State to State
The information provided here is as general as possible. It will apply in most cases, but it is important to understand that the laws in your state and even your local jurisdiction matter. Some states have almost no title loan laws at all while others heavily legislate this kind of lending. It helps to know the laws in your state so that you are aware of your rights as well as the rights of the lender.
What Does It Mean to Default on a Title Loan?
Defaulting on a loan means that you have failed to pay the principal and/or the interest in the agreed upon time frame. Both you and the lender are bound by the contract that was signed, and the limits of that contract are governed by law to some degree. When you default on a debt obligation, the lender has recourses available to it. In the case of a title loan, the loan is secured and the lender holds your title. Therefore, the recourse available to your lender is to repossess the vehicle and sell it at auction to recoup its losses.
Title loan lenders do not want you to default. Having to repossess a vehicle and sell it at auction is not some great windfall for them. Therefore, most lenders have options built into their contracts that help borrowers avoid defaulting. These can include:
- Payment deferrals
- Late payment fees
How Many Missed Payments Result in a Default?
Generally, you cannot default on a loan due to a single missed payment. However, the exact threshold will depend on your state and the specifics of the contract. In fact, the contract should be explicit in how late and missed payments will eventually lead to a default.
The Loan Defaulted. What Is the Next Step?
Before a title loan ever defaults, the lender will be in contact or at least attempt communication with the borrower in order to request payment or work out an alternative. As soon as the default threshold in the contract is met, the lender is in its right to repossess the vehicle. Lenders want to avoid this step if at all possible and will generally only make it at the point it has lost confidence in repayment. Lenders usually have contracts with repo agents who handle the logistics of vehicle repossession.
The Vehicle Has Been Repossessed. Now What?
As soon as the lender is in possession of the vehicle, it has the right to auction. There are generally laws governing how soon it must do that, the types of auction that are allowed and so forth. Lenders still want to avoid the auction even at this point if possible, so many offer a grace period in which you can get current with your loan in order to take back possession the car. Be mindful that there will usually be additional fees that will cover the repossession and so forth.
If you do not come to an agreement with the lender, the vehicle will be auctioned. Generally, these auctions will involve many other vehicles that have been repossessed due to title loans and other reasons. The car will generally have a reserve price that may not be published and covers the amount owed to the lender and repo agent. There may also be administrative fees.
What Happens If the Vehicle is Auctioned?
Sales are final, and the title will be transferred to the new owner. You have no rights to the vehicle at this point. In fact, you lost them as soon as the default threshold was met. However, you still have rights. The lender is not legally allowed to profit from your misfortune. The proceeds from auctioning the car can cover the amount owed to the lender, the amount owed to the repo agent and any administrative fees up to a legally defined limit. If there is any profit beyond that amount, that money is yours, and the lender must issue it you in a timely manner in accordance with the law.
Will Defaulting Affect My Credit?
Title loans are secured loans. That means that credit is not involved unless some aspect of your loan was unsecured. Even if you miss a payment or three, as long as you make good on the loan before it defaults, your credit will not be affected. This can change as soon as you default on the loan, however. Repossessions are matters of public record, and they generally will affect your credit score. Therefore, if you have defaulted on a loan, you should do everything in your power to avoid the repo phase.
Can I Go to Jail?
No! In the United States, there is no such thing as a debtors’ prison or the like. A title loan is a civil debt, and you absolutely cannot go to jail for defaulting on a civil debt. The only debts you can go to jail for are federal crimes, such as failure to pay your taxes or failure to pay child support.