Are Car Title Loans Better Than Payday Loans?

When you are strapped for cash, it is easy to think about the quickest and easiest ways of getting a money to survive between two paychecks. In that time most people turn to the payday lenders for payday advance loans and title loans because it is the most convenient method to put money in your pocket. Some financial experts wouldn’t agree because they carry higher interest rates and bigger chance you will end up in a ‘debt trap’ and some will say these options are better than alternatives. To give you the details of each of the option, let’s first dig into the basics. After all, having a basic financial education without the university background can help you to swim around the financial traps more effectively.

Getting a loan does not mean you are financial incapable or dependent. This is the first thing you have to make terms with. Unforeseen life costs, sudden car repairs, necessary home investments or just life in general are all legitimate arguments for a help from a bank or a lender and there is no reason why you should feel inadequate or powerless when choosing some of the available loan options. What is crucial is choosing the right loan option. The seemingly small difference between them can actually have a huge impact on your finances and future reliability.

People who are in a major necessity for a financial funds either don’t have time to go over a lengthy procedures of getting a long-term loan or have a bad credit score which prevents them from being approved. But they can still be entitled to get an auto title loan or payday loan which are both heavily disputed in the public for their high interest rates, unfavorable terms and extortionate collection tactics. Both of the loans have some overlapping features and similar distinctions which borrowers should be aware of.
To read about the payday loans, check out our article on how and when to use them. Following is an overview about car title loans and their comparison with the payday loans.

What are title loans?

The same as payday loans, title loans are also small amount of money borrowed for a short period of time which you need to repay with certain fees. But unlikely to the payday lenders, title lenders hold your vehicle’s title as collateral. They assess the value and quality of the vehicle and usually lend up between 25 to 50% of that value. Basically, it is the exact amount of money you can get with a payday loan expect one difference. Depending on the amount, the loan can be settled all at once or in multiple installments during a certain period of time. To be approved for this type of the loan, you need to have a clear legal ownership over a car and no prior or current liabilities. If you’re unable to repay your loan, you might lose your car. If the lender is mild, he might offer a new 30-day term with a new finance and penalty charge. But if you are not that lucky, you can say goodbye to your car which the lender will use to pay off your debt. So why you should even consider that options?

Auto title loan vs payday loan

Classifying one or the other as "better" is somewhat hard as both of the options are usually aimed at the similar type of borrowers and with a similar withdrawal conditions. Also they possess the similar high risk when you don’t pay either of them on time. Nonetheless, obtaining the car title loan seems a slightly better idea when it comes to these three points:

  1. Repayment period. Payday loans are rarely issued for periods longer than two or three weeks. They can never exceed the previous stated amount of money because they require to be paid in full by the due date. Title loans on the other hand can be issued for a longer time (several months) during which repayment is possible without the consequences. Also sometimes they are larger than payday loans so they can be used for much bigger cash needs.
  2. Interest rates. Compared to the other loan options, auto title loans still hold enormously high interest rates but they are slightly lower than the ones of the payday loans. There is no escape for that the both of them are expensive but in the time you need a quick financial solution, taking a car title loan is a much wiser decision. A title loan will likely cost you to an average Annual Percentage Rate (APR) of 300% while for a payday loan (as the time frame is usually around two weeks) that rate cites to about 400% or more.
  3. Material asset. The lenders feel much more secure when giving a title loans as they are secured by a collateral which is a vehicle. This means they feel much solid and persuaded to prolong the repayment period if the borrower didn’t return the money on time. Of course, this should not be taken as an excuse but it gives you much wanted freedom to come up with a plan that will pay off your debts.
  4. Title loan buyout. This is one more way to extend your repayment period with lower extra fees. Unlike payday loans where you can end up in a trap of ‘rolling over’, title loan buyout works like refinancing which means more favorable rates and terms.

In the end, you have to ask yourself is the auto title loan a right choice for you. If you urgently need some money which is higher than your weekly income, than the title loans can be a better option compared to the payday loan. Title loans are best for the emergencies and situations where:

  1. You need money straight away.
  2. You have a bad credit score.
  3. You are bankrupted.
  4. You have two or more cars.
  5. You don’t have a bank account.

For more information about the payday loans contact our customer service.