Home > Managing Debt > Title Loans vs. Payday Loans: A Side-by-Side Comparison

Comments 0 Comments

Getting quick cash to cover unexpected or emergency expenses can be a very costly experience, particularly if you have little savings and less-than-stellar credit.

About 5% of American adults use payday loans to help pay the bills, but only about 1% — slightly more than 2 million people — borrow from auto title lenders. That’s according to a 2015 report by the Pew Charitable Trusts.

As restrictions on payday loans have increased, however, states where title loans are allowed have seen a rise in the number of lenders offering the auto-secured loans.

For people with bad credit or no credit history, these small-dollar cash loans might not be just a quick and easy solution for cash shortfalls, but could be viewed as the borrower’s only option.

If you are one of those people, here are some things to consider before signing any agreements.

The Skinny on Payday Loans

Availability: Payday loan stores operate in 36 states

Interest rate charged: An average of around 400% APR, according to the Consumer Financial Protection Bureau. (Payday and auto title lenders argue that these are intended as short-term lending instruments and APRs aren’t a good measure of how much they cost.)

How they work: In most cases, you’ll write a post-dated personal check for the amount you want to borrow plus a finance fee made payable to the lender. You enter this information online when applying for a payday loan through the internet. The lender then advances you the loan for a set period, usually 14 days. When that period is up, you pay the lender the loan plus finance fee in cash, or let them deposit the post-dated check. If you wish to extend the loan, you can write another post-dated check for the amount plus an additional finance fee. If you do not pay the debt in full at the end of the term, you will generally be charged additional fees and finance charges.

The downsides: Payday loans have high interest rates that can make it difficult for borrowers to pay off balances on time. It is very costly to be stuck in a payday loan cycle for a long time and can lead to larger financial problems.

The Skinny on Car Title Loans

Availability: Title loan stores operate in 25 states

Interest rate charged: Typically a 300% APR, according to the Federal Trade Commission, but lenders charge less in states that require lower rates.

How they work: You take your vehicle to an auto title lender — generally a storefront business — where the lender determines the value of the vehicle and offers you a loan for a certain percentage of that car’s value. You give the lender the title as collateral for the loan, giving the lender the ability to repossess your car if you do not repay the loan.

The downsides: Just like payday loans, title loans usually have high interest rates and extra costs including storage and repossession fees. The average lump-sum title loan payment consumes 50% of an average borrower’s gross monthly income, more than most borrowers can afford, according to Pew.

And, perhaps the biggest downside of title loans, if you miss just one payment, don’t pay the fees or can’t pay the accrued interest by the end of your loan term, your car could be sold or repossessed. Between 6% and 11% of title loan customers have a car repossessed annually, according to Pew.

Additional facts: Title loan customers spend approximately $3 billion annually, or about $1,200 each, in fees for loans that average $1,000, the Pew Charitable Trust survey found. Title loans are typically larger than payday loans. On average, title loan amounts are about $1,000 versus $375 for payday loans, the survey found. This is one reason that the estimated $1,200 spent annually by an average title loan borrower on fees is more than twice the $520 spent a year by an average payday loan borrower, Pew said.

Do Payday Loans & Title Loans Affect My Credit?

The upside for some borrowers is that credit checks aren’t typical, and loans often aren’t reported to the credit bureaus (though this can be a double-edged sword, since if you are making on-time payments that aren’t being reported, the financing isn’t helping you build credit). And neglecting other payments that do affect your credit is possible, if you’re struggling to cover the costly interest rates and finance fees. So, while many payday and title loans might not directly affect your credit score, they can still cause trouble for your overall credit health.

Alternatives to Payday Loans & Title Loans

If you’re strapped for cash and payday or title loans don’t seem like a fit, here are some alternatives:

  • Negotiate a payment plan with the creditor.
  • Charge the amount to your credit card.
  • Consider applying for a personal loan.
  • Use a cash advance on your credit card.

(You can read a full list of more title loan and payday loan alternatives here.)

Be sure to read the terms and conditions associated with any of these options carefully. Remember, you could qualify for more competitive offers or rates by improving your credit scores. You can see where your credit currently stands by viewing your free credit report summary, updated each month, on Credit.com. If you have evaluated all of your options and decide a payday or title loan is right for you, be sure to understand all the costs and terms before you apply as well.

More on Auto Loans:

Image: Bruce Shippeee

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team