Payday Loans vs. Title Loans

Have you ever found yourself in an emergency situation that requires some extra money and you need to cover the costs immediately? In this situation, there are two types of quick cash loans in the market today: title loans and payday loans.

Title Loans

When people hear the term “title loan,” they immediately think of a car loan; however, a title loan can be any type of loan that requires registered property as collateral. The title – when referring to this type of loan – is the document that establishes the person’s ownership over a particular asset. The title must be free from any judicial or administrative liens to be suitable for any financial transaction, such as collateral for loans. Title loans, also known as secure loans, come in a wide variety of options:

• Home loans
• Home equity loans
• Car loans, motorcycle loans, RV loans, truck and aircraft loans
• Stock and securities loans
• Business-related title loans, such as factoring loans and underwriting loans

When a title lender offers you cash, you sign over the title of your already-paid asset to secure the loan. There's no credit check and only minimal income verification. Typically, these loans must be paid in full in one month, and as a rule, the lender will hold the title in his possession until the loan is fully repaid.

Title Loan Interest Rates

Interest rates charged for title loans vary according to the value of the title's asset. For the lender, the risk involved in this kind of financial transaction is minimal given that he can always recover his money, even if he has to do it by legal means or repossession.

In the case of car, boat and motorcycle title loans, interest rates are generally very high. This is due to the high-risk nature of those particular loans, since the title lender must consider the risk of accident, theft, depreciation, and so forth.

For a car title loan, the lending company estimates the value of your car based on wholesale values, and then gives you a loan based on what it thinks your car is worth. The lending company will then keep your car's title until the loan is paid in full.

Generally, a car title loan is a short-term loan with a high interest rate; if you don't pay back the loan plus interest within the agreed timeframe, you've basically lost your car to the title lending company. The lending company will proceed to sell the vehicle to make a profit. If they are able to sell it for less than what you owe, you may have to pay the lender the difference. However, if the lender is able to sell it for more than your debt, they will keep the surplus.

Before you take out a car title loan, find out what the penalties are for late payments. It is important to realize that just one late payment can result in your car being taken away, or the loan's interest rate will increase because of late payments.

Payday Loans

Today’s economy makes it difficult for most of us to make ends meet financially, and there are times when we simply need some extra fast cash to be able to meet emergency expenditures. Payday loans offer a very convenient, short-term solution for people who struggle with their credit scores.

Payday loans – unlike title loans – are taken directly from a lender with no collateral and that is why they’re considered unsecured loans. People that prefer payday loans instead of title loans do so because they represent no risk against your car, home, or other asset. Payday loans require no traditional credit check, meaning that people with low credit scores will most likely be approved for the loan. Reasons for opting for a payday loan might include:

• Health-related expenses
• Car repair, tune-up, or overhaul expenses
• Divorce, job relocation
• Small business owners with immediate need of working capital on a short-term basis.
• Consumers who can’t afford the staggering fees incurred in bounced check fees, late fees, or wire transfer fees.

Payday Loan Interest Rates

A payday loan usually costs around $18 per $100 borrowed if it’s paid back within 15 to 30 days, which is equivalent to about a 485.45 annual percentage rate (APR). That might seem astronomically high; however, it is important to keep in mind that payday loans are meant to be short-term loan solutions. Therefore, the interest rates shouldn’t be evaluated on an annual basis. On a short-term basis, payday loans offer a very competitive APR rate.

Choosing Between a Payday Loan and a Title Loan

Having to choose between a payday loan and a title loan involves having a realistic assessment of your financial situation in order to avoid high loan rollover costs or repossessions. You need to be certain that you will have the income to repay the loan. Also, you must contemplate your present job situation and whether or not it looks promising in the near future.

Although neither loan requires a traditional credit check and both have similar APRs, title loans are more apt to be for higher loan amounts, depending on the value of the collateral asset. Title loans also entail the risk of losing a valuable asset due to payment defaults. Payday loans, on the other hand, do not require any collateral, and are best designed for smaller amounts of money and shorter repayment timeframes in order to keep costs low.