Need some money at short notice? It happens to us all. There are a few options you have in this instance if you need to borrow in a hurry.
Two popular ways to get some quick cash are car title loans, which are based on the value of your car, or payday loans, which are based on your next paycheck. Both options have pros and cons, which make it difficult to choose. For that reason, we’ve set out the facts about both here so you can make an informed choice.
Taking out a short term loan is a serious business, as you’ll need to pay it back. Remember that APR stands for annual percentage rate, and measures how much interest you will be charged to take out the loan over the year. Some lenders and types of loans come with more APR than others.
With the basics covered, let’s dive into the differences between these types of loans.
What Are Title Loans?
A title loan is a short term loan that holds your vehicle title as collateral. If you cannot repay the loan, your car will be repossessed and sold so that the lender regains their money.
In order to get money on a title loan, the lender will appraise your vehicle’s value. Then you’ll be offered a loan of anywhere from 25% to 50% of the value. The balances of these loans can reach as high at $50,000 in some states depending on the amount the vehicle is appraised for.
A typical title loan lasts for a period of 30 days. That means that you have 30 days to pay the loan back after you have signed the contract. The average interest rate of a title loan is around 8% to 25% a month, which translates to a standard title loan of being upwards APR of 300%.
While a title loan might seem like a good solution to getting hold of money when you need it, the dangers are risky if you fail to repay the money on time. In most cases, failing to repay the loan means that your car will be repossessed by the lender, who will then sell it to get their money back. Before taking out a title loan, carefully consider whether you will definitely be able to repay the lender. If you can’t, you could end up without a car so you need to consider how that will affect your life.
If you decide to go for a title loan, be careful who you go to. Most are found in shady places where a lot of untrustworthy business deals are made. If you choose not to get an online title loan, you’ll need to show up in person in order to get your car appraised. If you use one of our recommended lenders, they will send someone to you and everything is done online.
Looking for a title loan? See our recommended list of online title loan companies.
Summary of a title loan:
- Based on the value of your car
- You can get up to $50,000 depending on the lender
- The loan lasts for a period of 30 days
- The interest charge is 8 to 25% a month
What Are Payday Loans?
A payday loan is also a short term loan, which most users take out in order to pay for something they need before their next payday. The money is expected to be paid back on your next payday via a postdated check.
Payday loans include a finance charge calculated as APR. The APR charges on top of payday loans can be crippling, averaging at almost 400%, although it could be even more. There are further charges if you fail to pay back the money by the date agreed. The typical period of the loan is two weeks but can be longer.
If you are late paying back the loan, you don’t need to worry about your car being repossessed, but you do need to worry about taking another finance charge and a late fee. This might seem like not a big deal, but the fees add up. Payback periods for payday loans are fairly short compared to a title loan. You only have two weeks (on average) to pay back the money. If you’re late getting paid, for example, or your paycheck isn’t as much as you expected, your postdated check to the lender may not clear with your bank, incurring further charges on your loan.
Because of the lack of collateral, you can expect aggressive late payment methods and attempts by lenders to reclaim the debt. The lender might incessantly call you, send intimidating letters, and threaten legal action. They might even send debt collectors or bailiffs to your door if the debt begins to spiral.
Summary of a payday loan:
- Mostly used for smaller loan amounts
- Average loan length is two weeks
- Average APR is around 400% but can be more
- Interest is presented as a finance charge
Which is Better? Seeking Professional Help
Title loans and payday loans should be approached with caution. They way they’re structured can make dangerous money situations even worse. The lenders of these loans usually don’t have the best interests of the debtor at heart. They simply want to make a return on their money – and if you don’t fulfill your promise to pay it, you can end up in hot water.
On one hand, payday loans pose a lower risk of losing personal property. But, they have extremely high-interest rates compared to title loans.
On the other hand, title loans allow you to take out larger loans and have a longer payback period without pre-payment penalties, giving you more time to gather up the cash.
Before considering either loan, seek professional advice. They can recommend other methods to get the money you need that are less risky to you and your family. Common methods include selling things you no longer need, asking for an advance on your next paycheck, or, if possible, using a credit card.
Credit cards might seem scary, but their rates are far better compared to title or payday loans. You only pay a fraction in fees. Plus, there’s no interest at all if you pay it off within 30 days. Using credit also helps raise your credit score, helping you become more financially secure in the future.
If the only option you have is a payday or title loan, make sure that you do your research. Find a lender that has a good reputation and doesn’t charge outrageous fees and follows the law. The last thing you want is to be in more debt.