How Title Loan Settlements Work

Let’s say you took a title loan to get out of a financial jam. It worked, and things were getting back on track. You were making your car collateral loan payments with ease – until your employer suddenly cut your hours. Now, your loan payments are unaffordable and you’re considering settling your car equity loan to help you manage your debt. Before you do though, it’s a good idea to understand how title loan settlements work, their benefits and risks, and what you might be able to do instead.

Understanding Car Title Loans

A title loan is an installment loan that uses your vehicle’s title as collateral. When the lender approves your application, you’ll review and sign the loan agreement, receive the funds and the lender will place a lien on your car’s title. You’ll retain possession of your vehicle and continue driving it, provided you stay current on your payments. The lien will be removed from your vehicle’s title when you pay off your loan.

On the other hand though, the lender can sell your vehicle to recover the outstanding balance if you miss loan payments. Before this happens though, you should talk with them to see what your options are instead of defaulting on your loan. Car title loan settlement is one such option. However, there are a number of things to consider before going this route.

What Is a Car Title Loan Settlement?

A car title loan settlement is an agreement between you and a lender that allows you to pay off a car title loan for an agreed-upon amount that is less than the total amount owed. Settlement payment can be one-time lump sum payments or several scheduled payments over time. Once all agreed-upon settlement payments are made, the lender will also release the lien on your car’s title. Settling your auto title loan can potentially help you avoid vehicle repossession and reduce your overall debt.

Benefits of Settling a Car Title Loan

As covered above, a title loan settlement comes after successfully negotiating a lower payoff amount with the lender for an agreed upon settlement amount. Again, this means you’d pay less than the full outstanding loan amount, which could help reduce your overall debt burden. A settlement agreement also has the potential to help you put the debt behind you faster.

A fair settlement agreement will also let you maintain possession of your vehicle with a clear title, once the settlement payments are made. As good as this sounds though, there are some pretty significant downsides to consider.

Risks of Settling a Car Title Loan

The Potentially Negative Consequences of Settling a Car Collateral Loan Can Include:

• Credit Score Damage – While a car collateral loan settlement could indeed resolve your debt, it can also potentially have a negative impact on your credit. If your lender or loan servicer reports your payment performance to a major credit bureau, the settled title loan will be reported as “paid-settled” or similar. This could inhibit your credit opportunities for up to seven years.
• Potential Tax Implications – When you settle a vehicle-secured loan for less than the full amount owed, the IRS may consider the forgiven amount “cancellation of debt” income. The lender will typically send you an IRS Form 1099-C, which reports the amount of debt forgiven. You must list this amount as income on your tax return, which could increase your tax liability for that year.
• Legal Considerations – It’s important to carefully review the settlement agreement’s terms, including how the lien release will be conducted. You’ll also need to make sure you’re protected against future collections lawsuits and vehicle repossession efforts. It’s always a good idea to seek legal advice to ensure you understand your rights and obligations before signing a settlement agreement.

Title Loan Settlement Alternatives

Rather than title loan settlement, you may be able to receive assistance through your title loan lender or servicer through other means. They can include:

• Payment extensions: A change to your payment due date might be sufficient to allow you to honor your agreed-upon payment schedule. Some loans may even qualify for an extension of a month or two, allowing title loan borrowers to come up with the next payment and get back on track
• Loan modifications: Lenders are sometimes willing to modify your loan agreement to make it more affordable. Modifications may include a lower interest rate that results in more affordable monthly payments.
• Title loan refinance: Refinancing your title loan is another option worth thinking about. Some car title loan companies offer title loan refinances to borrowers whose loan is in good standing. Predictably though, that approach also has pros and cons.

Pros of Refinancing Title Loans

Title loan refinancing can enable you to reframe the terms of your existing car collateral loan. The idea is to secure a lower interest rate, reduced monthly payments, or an extended repayment period.¹ Doing this might help you avoid loan default and vehicle repossession.

Cons of Refinancing Car Title Loans

In addition to the associated loan origination fees and costs, you’ll risk paying more interest over the life of the loan, especially if the refinance comes with an extended loan term. If refinancing is used repeatedly, you may also risk falling into a cycle of debt from which you may have trouble emerging.

If working with your lender or loan servicer is not an option, your family or friends might be willing to help you meet the terms of your loan agreement to avoid a settlement too.

Conclusion on Settling an Auto Title Loan

If making on-time payments on your vehicle-secured loan is starting to feel overwhelming, a loan settlement isn’t your only option. Comparing the alternatives discussed here, you may find a better solution to help you keep moving forward and restore your financial confidence.

The customer service team at ChoiceCash can help you explore your options to help you get back on track and keep your vehicle. When you become a ChoiceCash title loan customer, our goal is to offer a transparent loan that can help you get your finances back in order.

If you have a title loan with another lender that is difficult to manage, apply today for a ChoiceCash title loan and see if you can qualify for more favorable terms.¹