Title Loans vs. Payday Loans: An Overview
Asking if title loans or payday loans are better is like asking which disease is better to get in the winter. Both loan products feature usurious interest rates, unfavorable terms and potentially aggressive collection tactics. A significant difference between a title loan and a payday loan is how you can borrow and the interest rates on each loan.
Title loans generally offer lower interest rates – for example, an annual percentage rate (APR) of 300% versus 400% for payday loans, if you call it a deal – but also impose higher penalties. heavy in the event of non-payment, because the lender can take possession of your vehicle.
Title lenders typically allow you to borrow up to 50% of the car’s value, and often up to $5,500, but some lenders will go higher depending on the vehicle and allow borrowers to take out a loan of $10,000 or more.Payday lenders usually allow you to borrow a few hundred dollars.
Key points to remember
- Payday loans and title loans are two high-risk loans with very little return other than quick access to cash.
- Underpaid people often have to rely on payday loans to pay for necessities between paychecks.
- Title loans are risky because you can lose your vehicle, which serves as collateral for the loan.
- Because of the collateral, title loans allow you to borrow a lot more money than a payday loan.
- Both loans should be used as a last resort, and even then, with caution due to their high fees and exorbitant interest rates.
Payday lenders offer short-term cash loans in exchange for a post-dated check, usually dated your next payday. The amount of the check includes the total of the loan and finance charges. For example, you write a check for $115 to receive a loan of $100. Given a loan term of two weeks, which is relatively standard, the $15 finance charge equates to an APR of nearly 400%, and that’s assuming you repay the loan on time.
If your post-dated check fails to clear the bank and you don’t make other arrangements to pay by the due date, the lender defers your loan to a later two-week period.The lender will also add another finance charge and usually assess an additional late fee or penalty. In a short period of time, you could end up paying several multiples of your original loan amount.
Many payday lenders prey on low-income people and those in desperate need of money, and often their businesses are located in undesirable locations, but not always. You can circumvent the need to go there by searching for a lender online, but that exposes you to another set of risks. Some payday lender websites are nothing more than scams to extract sensitive personal information.
In some states, laws have been enacted to require payday lenders to offer extended repayment plans to those who experience financial hardship and cannot repay their loans.These state-sanctioned extended repayment plans mean you only have to pay what you owe and don’t have to borrow again, keeping the cycle of debt and fees in check. Classes.
The only silver lining of a payday loan is that it is unsecured debt, which means the lender has no collateral to seize if you are unable to repay the loan.
Title lenders offer short-term loans while holding the title to your vehicle as collateral. The lender assesses the value of the vehicle and offers to lend up to a certain percentage of that value, usually 25-50%. Title loan balances can be much larger than payday loan balances, in some cases as high as $10,000. The typical duration of a title loan is 30 days, with average interest charges of around 25%. This means that a standard title loan APR is 300%.
Like payday lenders, title lenders impose the heaviest expense when you don’t repay the loan on time. If you’re lucky, the lender may offer to extend the loan for another 30 days, charging new finance charges and usually an additional penalty. If you’re not so lucky, the lender may repossess your car and sell it to pay off your loan.
Obtaining a title loan usually requires you to go in person since the lender must appraise your vehicle. Mobile title lenders exist but almost always charge extra to come to you.
Because a payday loan is unsecured, lenders have been known to use aggressive methods to collect late payments. These tactics include incessant phone calls, intimidating letters and threats of litigation.
Ranking one or the other as “best” is fraught with pitfalls, as payday loans and title loans tend to make a precarious financial situation worse. Payday loans pose less risk of losing personal property, while title loans have slightly lower interest rates (although still very high) and allow for larger loan amounts.
If you face an unexpected expense and are low on funds, the best ways to raise money are to sell items you no longer need, ask your employer for an advance on your next paycheck, or, if possible, to use a credit card.
While credit cards are frowned upon for having high interest rates, their rates are only a tiny fraction of what you pay for a payday loan or title loan. Also, most credit cards don’t charge interest if you pay them off within 30 days.