Car title loans and Payday loans are often compared and contrasted and sometimes used interchangeably. While both loans are considered to have similarities, the truth is they are very different loans and really have few similarities other than they are both short term solutions.
First, we’ll define car title loans. Then we’ll define Payday loans. We’ll also go over the typical uses for each loan and compare the benefits, costs, and risks of both loans.
Car Title Loans
Car title loans are secured loans where you borrow money using your car as collateral for the loan. The repayment period and interest rate depends on both the state you live in and the lender you choose to do business with.
They are not permitted in every state; and the states where they are permitted each treat them differently. This makes describing title loans with any definitive terms difficult.
Repayment periods can be as short as 30 days or less and as long as several years. Recently, car title loans with monthly installments have increased along with longer repayment periods. These are not available in every state that allows title loans and are sometimes referred to as vehicle equity loans.
Single payment title loans typically have a repayment period of 30 days. This means the entire loan amount, plus interest and fees, is due on the 30th day.
If you cannot repay the loan amount within 30 days, the lender may allow you to roll over the title loan. This can get costly, especially when you roll over the loan more than once.
Car title loans with monthly installments are usually easier to repay. Many lenders are offering and even encouraging long repayment terms often for several years. This is not advisable with a high interest rate.
We highly recommend keeping your car title loan as short as possible to keep the cost from getting out of control.
Car Title Loan Annual Percentage Rates (APRs)
Car title loan Annual Percentage Rates (APRs) vary from state to state and lender to lender. They are usually quoted using the Monthly interest rate. Monthly interest rates of 20% (240% APR) plus are not uncommon.
Interest rates for car title loans can vary widely even within a state depending on the lender. Remember to always read the loan agreement, and the fine print, when shopping for a title loan.
Google changed their advertising requirements several years ago declaring any lender charging 36% APR or more a predatory lender. As a result, many title lenders starting “offering” title loans for 35.99% APR.
We put “offering” in quotation marks because the reality is most title loans are for far more than 35.99%.
On the other end of the scale there are some title lenders charging 300% APR and even more. This, in our opinion, is excessive and difficult to repay.
Try to find a lender on the lower end of the scale; but keep in mind that if it seems too good to be true it probably is.
Payday loans are very similar today as they were 10 years ago. They are very short term loans, with repayment periods of two weeks to two months. The loan is usually for a fixed amount with a fixed fee.
For example, a $200 payday loan may have a fixed fee of $20. Instead of monthly payments, you write the lender a post dated check for the loan amount plus the fee. The total loan amount, including the fee, is due on the payment due date.
Payday Loan APR
Because of the short term nature and fee, the APR for Payday loans can be quite high. To determine the payday loan APR you can use our Payday Loan Calculator.
Payday loan APRs can range from 100% APR to over 500% APR depending on the amount and length of time.
Car Title Loan versus Payday Loan APR
Car title loans generally have a lower APR than Payday Loans. This is not always true and depends on several factors. These include the state, the lender, and the loan term.
One of the main differences between car title loans and payday loans is the loan amount. Loan amounts for Payday loans are often smaller when compared to car title loan amounts.
Payday Loan Amount
Payday loans usually range between $100 to $500. Generally, $500 is the most you can borrow with a payday loan. There are some companies offering online payday loans with amounts up to $1,000.
Car Title Loan Amount
Car title loans are directly related to the vehicle value. Some states have no maximum allowable amounts and some states have maximums. Additionally, some lenders have maximums.
It is not uncommon to see maximum amounts of $10,000. Other lenders have maximums of up to $50,000. Regardless, these are both significantly larger than a payday loan.
Car Title Loan versus Payday Loan Amount
The loan amounts for car title loans are often higher, in many cases much higher than Payday loans. The typical payday loan is for a couple hundred dollars, with the maximum in most states around $500.
Compare this the car title loans with maximums of $10,000 or more, and you can see how different these loans really are. If you need a loan for more than $500, and have a vehicle with equity, a car title loan may be a better choice.
As stated, payday loans usually have a fixed fee. Because the loan term is very short, the fixed fee can work out to a very high Annual Percentage Rate (APR). It is not uncommon to see Payday loans with APRs ranging from 200% to 500% and even higher.
Most car title loans, on the other hand, are now monthly term loans amortized over the loan period. Some car title loans are fixed fee 30 day loans, similar to payday loans in that respect. Because of the two different types of car title loans, interest rates can very widely from lender to lender.
Some rates are as low as 30% APR with extremes on the high side of 300% APR. Generally, monthly term loan type title loans will have a lower rate.
Single payment title loans require the entire amount paid in full with the fee at the end of 30 days. These types of title loans have the highest APR. We cover single payment and monthly term title loans in our title loan guide.
Payday Loans – Unsecured
Payday loans usually involve writing a post dated check to the lender for the payment amount. The lender deposits the check, and if it clears the loan is closed. If it doesn’t clear, the lender will likely try to collect.
Payday loans are unsecured loans, meaning there is no collateral for the lender to repossess.
Car Title Loans – Secured Loans
Car Tile Loans involve pledging your vehicle as collateral for the loan. This means if you default on the loan, the lender can repossess your vehicle. This is the main difference between a secured loan and an unsecured loan.
Because title loans are secured, there is usually no credit check. If you want to learn more about title loans, read our guide on how to get a title loan.
Payday Loan Requirements
Payday loans require steady employment, a checking account, and a post dated check. You will need to bring pay check stubs to get a payday loan. They also require a valid government issued identification and, in some cases, a credit check.
Car Title Loan Requirements
Car title loans require a vehicle with a lien free title, drivers license, insurance, and a way to repay the loan. Unlike payday loans, a car title loan does not always require paycheck stubs and usually do not require a credit check. You can also get a car title loan without a bank account.
The way to repay the loan can be from any type of income such as a tax return, legal settlement, annuity payments, pensions, or other form of income. It is possible to get a title loan without a job as long as you have some way to repay the loan.
Car Title Loans versus Payday Loans Requirements
The most obvious difference between car title loans and payday loans related to requirements is a vehicle. To get a car title loan requires a vehicle, with no liens. A payday loan does not.
Advantages and Disadvantages
As with all loans, both car title loans and payday loans have advantages and disadvantages.
Car Title Loans – Advantages
Car title loans have a much higher maximum amount and, in many states, a much longer repayment period. Most lenders do not have prepayment penalties, which provides more flexibility with repayment times.
Payday Loans – Advantages
Payday loans do not require collateral, so your vehicle is not at risk of repossession.
Car Title Loans – Disadvantages
Car title loans require collateral. You will need to pledge your vehicle and as a result your vehicle can be repossessed. Depending on the lender, they can also have high APR.
Fast Title Lenders specializes in car title loans with the best rates. We provide a title loan calculator which calculates the interest rate, monthly payment, and payment schedule estimate for any title loan amount.
Payday Loans – Disadvantages
Payday loans have a low maximum amount, short repayment period. Because payday loans are usually a fixed fee in a short period, this usually works out to a very high APR.
Car Title Loan or Payday Loan?
So, which one is better? The answer depends on your situation. If you qualify for both, then decide how much you need to borrow and for how long. If you need more than $500 for more than 30 days, than you may want to look into a title loan.
When you only need a couple hundred dollars for a few weeks then a payday loan may be the way to go. With a title loan, you will likely pay a lien fee and will be pledging your vehicle as collateral.
Before getting either loan, always look into alternatives. Many financial institutions are now offering Payday Alternative Loans (PALs) which have very similar requirements to a Payday loan with a much lower cost.