What Happens If My Car Is Totaled and I Have a Title Loan?

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Many people take out auto title loans as a way to get some quick cash in a pinch. Unfortunately, many people also get into car accidents. But what if both of these happen to you? If you're in an accident, and your car, which has a lien on it, is significantly damaged and could be called a total loss, you'll need to know what will happen to your title loan.

Title Loans: The Basics

An auto title loan – also known as a car title loan or fast auto loan ⁠– is a type of loan in which you pledge your car as collateral. If you default, the lender can repossess your car. These short-term loans usually last 30 days and can be taken out for up to 25 to 50 percent of the fair market value of your car.

So, if you own a car that's worth $2,000, you can get at most $1,000 out of a title loan on it. If you can't pay that back in 30 days, your loan might be rolled over for another month, though this would mean additional fees and interest.

Title loans are generally done without credit checks, so as long as you own a car outright (some lenders will also accept a car you have only partial equity in) this can be a quick way to get some money if you have bad or no credit. However, title loans come with some risks and restrictions.

Read More: How Do Title Loans Work?

Lenders and Risks of Title Loans

Since lenders are taking a risk by lending money without a credit check, they take various steps to make it a safer investment. In addition to holding the title to your car, the lender will usually ask to see a driver's license, income verification and proof of insurance. The lender may also require installation of a GPS tracker in the car or a device that lets them disable the ignition, and they may also make copies of the keys. If the borrower defaults on a title loan, the lender may use all these measures and information to repossess your car.

Lenders and Interest Rates

Finally, title loans usually come with very high interest rates and other fees. This is another measure lenders take to make these high-risk loans better investments, but it can spell trouble for the borrower. The rates advertised on auto loans are usually monthly rates, meaning the borrower owes all the interest that very month, as opposed to the yearly, or annualized, rates advertised on most other loans, which spread the interest over the course of a year.

Say a $1,000 title loan is advertised at a 20 percent interest rate. If it were annualized, that would mean $200 of interest spread over a year, or roughly $17 per month. However, if it's a monthly rate, the entire $200 of interest is due at the end of the first month. So to pay everything off you'd have to give the lender at least $1,200. This equates to an annualized rate of 240 percent.

Many title loans have annualized rates in the 200 to 300 percent range, and many people who take out title loans end up owing significantly more in interest than the principle amount they actually borrowed. A lot of people who end up in such situations are unable to pay off the loan, and the lenders repossess their cars and send the loan to collections, which damages the borrower's credit.

Total Loss Car and Title Loan

What happens if you get in an accident and your car is suddenly worth less than you borrowed, or if the car is completely totaled? This is where that insurance policy the lender wanted to see comes in. When you get into the world of auto insurance or title loans, it really pays to know the fair market value of your car. This is a number that both your lender and your insurance company care about a lot, so you should, too.

The fair market value of your car takes into account how old the car is, what the mileage on it is, and whether it has any damage. This is the amount your insurance company promises to cover, and is also the amount your title loan lender based their loan on. For most insurance companies, a car is considered a total loss, or totaled, if the cost of repairing it would exceed 80 percent of its fair market value.

In that case, rather than paying to repair the car, the insurance company will pay out the fair market value of the car as it was the instant before the collision. You can look up the fair market value by using the Kelley Blue Book website.

Car Balance Is Still Owed

What happens to your title loan and the value of your car if it's been totaled? The bottom line: You will still owe the balance and any interest on your title loan. When the insurance company has declared the car totaled, that means there's no collateral left in the vehicle for your title loan. But, depending on what kind of accident you had, what kind of insurance coverage you have, and some other factors about your situation, you could have several options for paying off that loan.

If you get into an accident, whether you have only liability coverage or have comprehensive coverage makes a big difference. Your insurance company is not obligated to pay off any loans on your car – they only cover the actual cash value of the car in the moment before the collision. If you have full or collision coverage, the insurance will reimburse that amount, first to any lien holders, then, if there's more left over, to you.

If you have liability coverage only and are found at fault, you will not receive any compensation. If you have liability coverage and another driver is found to be at fault, you will have to reach a settlement with that driver's insurance company to get your money. The insurance company will again pay your lender first, then you. And if the other driver doesn't have insurance, or if your insurance lapsed, then you're out of luck again, so it's best to have collision coverage if you plan to take out a title loan on your car.

Insurance Payouts That Fall Short

If the insurance payout doesn't cover what you owe, your lender may give you some other options. If you have a second vehicle, the lender may be willing to apply the outstanding balance of the title loan to the other vehicle. This would be capped, however, by how much equity you have in the second vehicle.

If you don't have a second vehicle, the lender may be willing to change the type of financing on the loan from a title loan to a personal loan, which would likely come with different terms or conditions.

If none of these options work out, you may end up defaulting on the title loan. In that case, it will negatively affect your credit, and your loan may be sent to collections. Then you will have no vehicle to get to work or school, and will still owe money on it. This is a worst-case scenario, but it could happen even if you're a safe driver, take care of your car, and were staying on top of your payments up to that point. It's best to have full insurance coverage at all times and to consider the terms of title loans carefully.