Car Title Loans and Payday loans are often compared and contrasted. The truth is they are both very different loans. First, we’ll define car title loans. Then we’ll define Payday loans. And finally we’ll discuss the typical uses for each and compare benefits and risks.
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 the lender. Repayment periods can be as short as 30 days and as long as several years. Recently, car title loans have become more often monthly term loans with longer repayment periods. Online title loans with monthly payments are now an option for most consumers.
Car Title Loan APR
Car Title Loan APRs vary from state to state and lender to lender. They are usually quoted usually the Monthly interest rate. Monthly interest rates of 20% plus are not uncommon. Fast Title Lenders provides car title loans at the lowest rates of 8% per month.
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.
One of the main differences between car title loans and payday loans is the loan amount. Loan amounts for Payday loans are usually small 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 lender 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 is usually 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% -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. 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.
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, as a result your vehicle can be repossessed. Depending on the lender, they can also have high APR. Fast Title Lenders specializes in providing an alternative to the typical title lenders. Our title loan interest rates are much lower, a fraction of what many title loan companies charge. We provide a title loan calculator which provides 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.