Does Loan Forgiveness Apply to Car Title Loans?

by Evan

Car title loans are a type of short term, secured loan which uses your car as collateral. Title loans are therefore quite risky for borrowers because if you default, the lender has the right to repossess your car. 

In fact, a high percentage of car title loan borrowers default on their loans. According to WAMU, each year since 2010, there has been an increase in the total number of motor vehicles repossessed by title lenders.

Title Loans Are Quite Expensive

Generally, the amount of money that a person is entitled to borrow is based primarily on the resale value of the car. The interest rate for car title loans is also usually quite high. A typical APR or annual percentage rate for a title loan would be about 300 percent, which amounts to approximately 25 percent in interest per month. Therefore, if you take out a loan for $1000, at the end of a 30-day loan term, you would owe $250 in interest. On top of the high rate of interest, most lenders also charge several fees. 

What Type of Borrower Are Car Title Loans Suitable for?

Auto title loans are a convenient choice for people that have a bad credit history. Those who have a negative credit score will find it quite difficult to get a loan from a traditional bank. However, negative credit history is not something that lenders take into account when deciding whether an applicant is eligible to take out a car title loan. Most lenders do not even perform a credit check before approving an application.

Because of this, a person who applies for a title loan may be approved within a matter of minutes. According to 3 Steps Title Loans, many of its borrowers have their applications approved in about 15 to 20 minutes. Additionally, a borrower might be in a position to receive the money within 24 hours of the loan being approved. This means it is very easy to be approved for a title loan.

Why a High Percentage of Borrowers Default 

While title loans are approved quickly, it is not quite so easy to get out of a title loan obligation—Investopedia provides some alternative resources here. Additionally, many borrowers find that when they are unable to pay their loan back in time, the amount of interest they owe increases significantly.

This is because many title loan lenders will allow the borrower to take out subsequent loans where they are unable to pay back on time. For example, if a borrower is unable to repay the amount they owe after the initial term of 30 days, the lender often allows the term to roll over until 60 days, then 90 days, and so on. For example, if a borrower has a title loan for $1000 at 25 percent monthly interest, then they will end up paying $500 at the end of a 60-day extended period.

When this happens, a borrower will find that they will owe a substantial amount in interest and additional charges. Numerous consumers at this point will not be in a position to repay the loan and find that they are in over their heads. 

Is Debt Forgiveness Available To Borrowers Who Have Title Loans

Debt forgiveness is where a lender waives the amount a person owes, either in part of full. Certain loans, including student loans, have loan forgiveness programs where the borrower complies with specified rules or criteria. For example, some student loans are forgiven where a person has completed a significant amount of voluntary or community service. Unfortunately, however, there is no debt forgiveness program available for borrowers of title loans.

If you do find yourself in trouble and cannot pay your title loan debt, there are several options available. 

Negotiation with the Lender 

Some lenders may be reasonable enough to allow you to negotiate the amount to be paid. If you find that you’re unable to repay the loan, call your lender to ask them if you can settle the loan for a lower amount or pay the loan back in installments, rather than in one lump sum.

Lenders may be open to this type of renegotiation, as they will get some or all of their money repaid, instead of not at all. It is worth trying to negotiate as the first step, as at the end of the day, the worst they can say is no. 

Do note, if you agree to repay a lower amount than you originally owed, this will still impact your credit score.

Filing for Bankruptcy

If your finances are a mess and you feel you have no other option, you may consider filing for bankruptcy. This is quite a serious decision and you should consult with a lawyer before proceeding with filing for bankruptcy.

Voluntarily Forfeiting Your Car

This option should be used as a last resort. If you do end up losing your car because of your debt, it might cause further problems in your personal life. Many people rely on having a car to get to work and make a living. Many people will find that after their car is repossessed they have no way of getting to work, which causes further financial turmoil. 

Refinancing 

For some borrowers refinancing may be a viable option. To refinance successfully you’ll need to find a loan that has a lower interest rate. This might not be possible for all borrowers as many people resort to car title loans in the first place because they have a bad credit score.

As mentioned, many traditional lenders such as banks are unwilling to lend to individuals with a bad credit score. However, refinancing with an unsecured loan may be a better option as at least your car will no longer be at risk of repossession if you manage to pay the loan off. 

Conclusion

If you are in the process of considering a car title loan and have not yet committed to signing up to one, perhaps reconsider your options. See if you have access to a credit source that is lower in risk than a car title loan. You should be particularly careful if you rely on your car to get to your place of employment. Many people who lose their car due to defaulting on their repayments find themselves in a worse situation than before they took out the title loan.

If you find that, after careful consideration, a car title loan seems like the best option for you, make sure that you can cover the cost of the repayment on time. Read all the terms and conditions of the loan agreement before you sign anything. 

If you have already signed up for a car title loan and find yourself unable to repay the loan, either negotiating with the lender or looking into a refinancing option may be the best option for you. First, it is worth speaking with your loan provider to see what options are available. Some lenders are more reasonable than others and you may be pleasantly surprised with the outcome.

Rotter, K. (2020, March 03). 8 Cheaper Ways to Raise Cash Than Car Title Loans. Retrieved June 25, 2020, from https://www.investopedia.com/articles/personal-finance/112814/top-alternatives-car-title-loans.asp

Which is Better? Chapter 7 bankruptcy or chapter 13 bk. My AZ Lawyers. (2020, March 16). Retrieved June 25, 2020, from https://bankruptcy-az.com/chapter-7-bankruptcy-or-ch-13/

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