Important Differences Between Payday and Title Loans

Over the past several years, payday loan lenders across the country have come under fire for their high interest rates and expensive fees. With several states attempting to regulate their use, payday loans are bound to receive even more negative attention in the coming months. However, there is another type of loan whose questionable practices seem to have gone almost completely unnoticed in the public’s eye – car title loans.

Why do people need to pay attention to car title loans? Because there is a lot at stake for borrowers. Unlike payday loans, which require no collateral, car title loans use your vehicle to secure the loan. Assuming you pay back your loan in full and on time, you should receive your vehicle back with no problems. As we all know, things don’t always go to plan and it’s easy to be late or miss a payment. Should this happen with a car title loan, you could very likely be forfeiting your vehicle. Often, all it takes is one late payment and the lender will sell your vehicle to pay off the loan. Some lenders could even keep the difference between the vehicle’s selling price and the amount of the loan, possibly leaving you out thousands of dollars. You’d think that since you’re carrying all the risk for a car title loan, it might have a fairly low interest rate. Unfortunately, that’s not the case, as these types of loans carry high interest rates despite being secured by collateral.

Which Should You Consider?

Clearly, both payday loans and car title loans should only be used as a last resort, but which one is the better option? Each type has its advantages, but in the end, most people agree that payday loans are the better and less risky option. Take a look at these important factors and decide for yourself:

• As you know, you’re using your vehicle as collateral for car title loans. With a payday loan, there is no collateral - all you’re putting up is a promise to pay the loan back. The question to ask is, would you rather lose your vehicle or owe some more money if you’re late paying back a loan?
• Consider who’s taking the risks when borrowing a payday loan or title loan. With payday loans, all of the risk is on the lender to get their money back from you. Now with a car title loan, all of the risk is on you to get your vehicle back from the lender.
• While interest rates for both payday loans and title loans are fairly high, title loans tend to be slightly lower. Of course, that’s because your vehicle is securing the loan, but is risking your vehicle worth the difference in interest rates? You may find that the difference only adds up to $10-$20, which probably seems trivial compared to your vehicle’s value.