The Consequences of Defaulting on a Car Title Loan
A car title loan is a primary example of a secured cash advance. If you need cash in the short run for an expense, you can liquidate a portion of the equity in your automobile to meet the need. You may be able to do this directly with your auto lender if your loan is still active. Otherwise, most traditional and alternative lenders will accept a car title as collateral on a cash advance. However, if you default, your car will be repossessed in addition to other penalties.
Repossession of Asset
The first thing that will occur if your debt moves into default is the forced repossession of your vehicle. Repossession companies are not the most tactful businesses in the market. Rather, you will likely find your car is forcefully seized while you least expect it. Repossession companies are known to show up at work or while you are at school to seize your asset. This can be embarrassing, and it can create a very negative situation for you. Depending on the terms of your contract, the lender may not even need to notify you prior to sending a repossession agent to seize your vehicle.
Repossession is extremely damaging to a credit score. Your score will already drop through multiple missed payments, and these penalties will be multiplied if you actually default. While a missed payment only stays on your record for approximately two years in most states, a default can stay on your credit score for up to 15 years in some states. To get a new car loan, you will likely have to work with an alternative lender. Traditional lenders will be scared off from lending to you in the future, and this can include a mortgage lender.
The best defense against default is proper planning. Plan for your debts as you would any other expense. Your total debt payments each month, including credit cards, rent and student loans, should never exceed 50 percent of your monthly income. If you have a mortgage, this amount alone should never exceed 30 percent of your income. This is a good guide to show you how much additional debt you can reasonably afford to take on. Before taking on additional debt, even if it is within your budget, you should always save three months of payments up front in an emergency fund. This way, if you lose your income, you can continue to make payments while you seek solutions.
Opting for Voluntary Repossession
Sometimes, repossession is inevitable. Perhaps you lost your job and cannot find new employment. You have contacted your lender, but you found out refinancing the loan is not an option. Moving toward voluntary repossession can save you from some of the negative penalties. You will make arrangements with your lender to drop off the car. The lender will expect you at a given time and place, and the arrangement will completely release you from further obligation toward the debt. You will not see the repossession on your credit score.