Title Loans vs. Payday Loans: An Overview

Asking if title loans or payday loans are better is equivalent to asking which illness is best to get in winter. Both loan products feature usurious interest rates, unfavorable terms, and potentially aggressive collection tactics. A significant difference between a title loan versus a payday loan is how you can borrow and the interest rates on each loan.

Title loans typically offer lower interest rates—for example, a 300% annual percentage rate (APR) versus 400% for payday loans, if you call that a deal—but also impose worse penalties for nonpayment, as the lender can take ownership of your vehicle.

Title loan lenders usually let you 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 $10,000 loan or more. Payday lenders usually let you borrow a few hundred dollars.

Key Takeaways

  • Payday and title loans are two high-risk loans with very little give-back other than fast access to cash.
  • Underpaid individuals often have to rely on payday loans to pay for necessities between paychecks.
  • Title loans are risky because you can lose your vehicle, which acts as collateral for the loan.
  • Because of the collateral, title loans allow you to borrow much 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 Loan

Payday lenders offer short-term cash loans in exchange for a postdated check, usually dated for your next payday. The amount of the check includes the loan total and a finance charge. For example, you write a check for $115 to receive a $100 loan. Given a two-week loan term, which is relatively standard, the $15 finance charge works out to an APR of nearly 400%, and this assumes you pay back the loan on time.

If your postdated check fails to clear the bank and you do not make other arrangements to pay by your due date, the lender rolls your loan into a subsequent two-week term. The lender will also tack on another finance charge and typically assesses an additional late fee or penalty. In short order, you could be on the hook for several multiples of your original loan amount.

Many payday lenders prey on low-income earners and those desperate for cash, and often their businesses are located in undesirable locations, although not always. You can circumvent the need to go there by seeking a lender online, but doing so subjects 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 for those who get into financial trouble and can't pay their loans back. These state-sanctioned extended repayment plans mean you only have to pay what you owe, and you are not forced to borrow again, thus keeping the cycle of debt and fees ongoing.

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 pay the loan back.

Title Loan

Title lenders offer short-term loans while holding your vehicle's title as collateral. The lender appraises the vehicle's value and offers to lend up to a certain percentage of that value, usually 25% to 50%. Title loan balances can be much larger than payday loan balances, in some cases reaching as high as $10,000. A typical title loan term is 30 days, with the average interest charge around 25%. This means that a standard title loan APR is 300%.

Like payday lenders, title lenders impose the biggest expenses when you fail to repay the loan on time. If you are lucky, the lender might offer to roll the loan into a new 30-day term, levying a new finance charge and usually a penalty charge on top of that. If you are not so lucky, the lender may repossess your car and sell it to pay off your loan.

Obtaining a title loan generally requires you to show up in person since the lender must appraise your vehicle. Mobile title lenders do exist but almost always charge extra to come to you.

Because a payday loan is unsecured, lenders are known for using aggressive methods to collect late payments. These tactics include incessant phone calls, intimidating letters, and threats of litigation.

Special Considerations

Classifying one or the other as "better" is fraught with difficulty, as both payday loans and title loans tend to take a precarious financial situation and make it worse. Payday loans pose less risk of losing personal property, while title loans feature slightly lower interest rates (though still rapaciously high) and allow for more significant loan amounts.

If facing an unexpected expense and low on funds, better methods to raise money include selling items you no longer need, asking your employer for an advance on your next paycheck, or, if possible, using a credit card.

While credit cards receive a bad rap for having high-interest rates, their rates are a tiny fraction of what you end up paying for a payday loan or title loan. Moreover, most credit cards charge no interest at all if you pay them off within 30 days.