Title loans use your car as a form of security when issuing a loan. When you total your car, a liability insurance payment can settle the balance of the loan. If you don't have liability insurance, you need to renegotiate the terms of your loan or offer an additional form of collateral to the lender.
How Title Loans Work
A title loan is a high-interest personal loan using your car as collateral. Because you hand over the title to your car – and, in some cases, a copy of the keys – the lender can seize your car if you fall behind on payments. Title loans usually have 30-day terms, so if you borrow $500 today you'll be expected to pay back the $500 plus fees and interest in 30 days.
Interest on a title loan can be as high as 25 percent. This might seem equivalent to what you would pay on a high-interest credit card, but the 25 percent interest on a credit card is an APR or annual percentage rate. The interest on a title loan is a monthly rate, equivalent to a 300-percent APR. If you borrow $500, expect to pay back $625 or even more depending on other fees. If you can't pay the loan back in 30 days, the lender will let you roll it over for additional fees. It's easy to fall behind and pay far more than what you originally borrowed.
Insurance Payments After a Wreck
Most insurance companies consider a car to be a total loss if the cost of repairing it is more than 80 percent of its estimated value. If your car was worth $2,000 and repairing it would cost $1,600 or more, the insurance company typically won't pay for any work on it. It will write you a check for $2,000 to cover the cost of the vehicle instead.
Car Loans Versus Title Loans
If you still owed money on the original car loan, you would be expected to keep making payments on the loan even though the car was totaled. The settlement check would be applied to your loan, but you'd still be expected to pay off the balance. The same principle holds true with a title loan. Your car acts as collateral for the loan and repayment remains an obligation, even if the collateral no longer exists. In many instances, title loans require the existence of liability insurance to ensure funds are made available for repayment in case a wreck occurs.
Renegotiating a Loan Post Wreck
Title loan agreements vary from one lender to another. However, a typical loan agreement will specify that the car is security for the loan and that the lender may repossess the vehicle if you default on the loan. The lender can then sell it off to recoup its losses. After a wreck, the collateral is devalued which limits the ability of the company to generate enough funds to meet the loan obligation. If you can't pay the balance in full, ask to renegotiate the loan without collateral. If the lender will not allow this, attempt to find a co-signer or a new form of collateral before defaulting.
- CNN: Why Car Title Loans Are a Bad Idea
- Consumer.gov: Car Title Loans
- Nolo: My Car Was Totaled But I Still Owe Money on It
- Missouri Division of Finance: Title Loan Agreement
- Washington Post: NYT on Auto Title Pawns
- George Mason University School of Law: Consumer Use and Government Regulation of Title Pledge Lending