When a borrower fails to repay a loan, that’s considered a default. The procedure for what the lender can do in this situation depends on what type of loan it is.
A title loan is one of the most common types of short-term loans, although it’s only legal in certain states. Along with payday loans, title loans provide consumers with quick cash, often thousands of dollars. However, interest rates are very high, which can lead to a cycle of debt.
Here’s what happens if you default on a title loan.
The General Default Process with Title Loans
It’s important to realize that title loan regulations vary quite a bit depending on which state you’re in. Every state sets its own regulations, and some of these regulations affect what happens after a default. However, there are a few things that will typically happen if you default on your title loan and fail to catch up on your payments.
The lender will already have your car title, as they take this when you apply for the loan and keep it until the loan is paid off. After you default, they will send someone to repossess your car. Some states allow lenders to put a GPS tracking device on your car so they have an easier time finding it should you default.
You can make it easier by turning your car over to the lender. If you don’t, the lender is legally allowed to take your car but can’t break the peace or commit any crimes in the process. For example, the person who comes to repossess the car couldn’t force you out of the driver’s seat or trespass onto your property to get it. The law does typically allow them to come onto your property if the car is in plain sight.
After repossessing your car, the lender sells it to cover what you owed on your title loan.
Differences from State to State
Now, let’s look at how title loan regulations on the repossession and sale of a car can vary depending on your state.
Some states have a right to cure. This is a time frame the lender must wait after you default before repossessing your car. If the state doesn’t have this, then the lender can come repossess your car as soon as you’ve defaulted. In states with a right to cure, the lender usually must send you notice of the default and give you a minimum amount of time to make your payment. If you do that, the lender can’t repossess your car.
The other area where states can vary is what happens when the car sells for more or less than what you owed the lender. If your car sells for less than what you owed, then there will be a deficiency balance. If your car sells for more than what you owed, then there will be a surplus balance.
The most borrower-friendly states require title loan companies to send borrowers any surplus balance, but don’t require borrowers to pay the title loan company if there’s a deficiency balance. Other states are the opposite, not requiring title loan companies to pay a surplus balance but requiring borrowers to pay a deficiency balance. Then there are the states that simply make sure the lender gets the total amount it’s owed, meaning it pays any surplus while the borrower pays any deficiency.
Some states get more complex with deficiency and surplus balances. Mississippi is one example, as the state requires title loan companies to pay borrowers 85 percent of any surplus balance.
Avoiding a Default
The best way to avoid defaulting on a title loan is to avoid getting one in the first place. In most states, the high interest rates will cost you quite a bit of money for the convenience of some fast cash.