Comparing Payday Loans to Title Loans Which loan is best for me?
Secured versus unsecured
One of the big differences between payday loans and title loans is security. A secured loan means the person getting the loan, has something of value that can be used to guarantee the loan. Most commonly used are cars, however, anything with a title can be considered for a title loan. Think about what you pay personal property tax on. Those are items with a title.
In order to get a title loan, you must physically have the title. If you have a car loan, for example, then the car is used as collateral in that loan, so the lender will hold the title until the car is paid off. When the car gets paid off the title is mailed to you and you have what’s called “clear title”. If you have clear title then it can be used to secure a title loan.
When you have collateral, you are telling the lender that they can hold the title of the car until you pay the loan off. You still have the ability to use your vehicle but the lender is holding the title. This means you cannot sell your car, but you can drive it. If for any reason you do not pay the loan off, the lender will come get your car and then they will sell it to pay back the loan.
An unsecured loan means you do not use any “collateral” for the loan. While a title loan is given to a customer based on the value of the car, an unsecured loan must be based on something else. So a payday lender will look at how much money you earn each week, how long you have been on the job and how long you have lived in your home, to determine what they can lend.
Payday loan interest rates will be much higher than title loan interest rates, because of the collateral. Secured loans will almost always have a lower interest rate than an unsecured loan. Why?
With a payday loan, the lender looked at how much you need and how much you earn and determined what they could lend you and at what rate. If the next day you went into work and got fired or quit your job, you won’t be able to pay the lender back. This is a very high risk, because then the lender has the expense of trying to find you and get paid. That high risk is represented by the high interest rate.
With a title loan, if the individual gets fired or quits their job, and cannot pay the loan, the lender will come take the car. Then the lender gets paid. This security results in a much lower risk and a much lower interest rate.
Which loan is right for me?
- Time – Both a title loan and a payday loan can be gotten the same day.
- How much do I need to borrow – If you only need a small amount of money, say a hundred dollars that can be paid back in a week, the pay day loan may be the best option. If you need a larger amount, say 500 dollars, the title loan will be a better option.
- What are the fees in interest rates? The title loan will always have the lowest fees and interest rates. The payday loan does not require you to have a car title to get the money you need. If you have a title to use for collateral, understand if for any reason you cannot pay the loan, you will lose your car. Some people feel the higher interest rate is worth not risking their vehicle.
All types of borrowing should be considered carefully. Ask yourself why you need the money? Can it wait until your next paycheck? Is there a friend or family who can lend you the money until you get paid? If your car is broken down or your lights are being turned off, then getting the money today may be necessary. If this is the case, lenders like payday lenders and title loan lenders are there to help.