Payday Loans vs. Title Loans: Which Are Worse?

Inside Subprime: Dec 19, 2018

By Lindsay Frankel

If you have bad credit and have fallen on financial hardship, taking out a payday loan or title loan might seem like the only way to pay your bills or put food on the table. Unfortunately, both these loans come with significant risks. But which type of loan causes more financial harm? While there isn’t a straightforward answer, it’s important to understand how payday and title loans will affect your financial future.

Accessing Payday Loans and Title Loans

Both payday loans and title loans are no credit check loans, so you don’t need to have good credit or even established credit history to obtain them. A payday loan is easier to access than a title loan, because you don’t need to own a vehicle as collateral. You’ll typically need to show identification, proof of income, and proof of a bank account to obtain one of these small-dollar loans. You write a postdated check for the amount of the loan plus fees, typically coinciding with your next pay period, which the lender can cash if you haven’t paid the loan back within the time allotted.

A title loan, on the other hand, requires you to bring your vehicle to the title lender, so they can assess its value. Borrowers are offered a loan worth a percentage of the car’s value, which can be a larger dollar amount than a payday loan.

Interest Rates, Fees, and Consequences

Payday loans have annualized interest rates of almost 400 percent on average, according to the Consumer Financial Protection Bureau. By comparison, the Federal Trade Commission estimates that title loans have APRs of about 300 percent, but you might find lower rates for both in states that place stricter limits on lenders.

For both loans, there are financial consequences for failing to pay off your balance on time. Lenders will typically offer to roll-over your loan, but this adds additional fees and interest to your total balance, making it even more difficult to get out of debt. This is a common problem, since the fees associated with these loans make them unaffordable for most people. 4 out of 5 payday loans are renewed or rolled over within two weeks.

Defaulting on a title loan can be even more devastating, since missing a payment can result in repossession of your vehicle. The CFPB found that one in five title loan borrowers have their vehicles seized for defaulting on payments. Because many people need access to a car in order to work, repossession can add another layer of financial stress to indebted borrowers.

Alternatives to Payday Loans and Title Loans

If you’re struggling to pay your bills, consider seeking help from government programs, local nonprofit organizations, or family and friends. If you must borrow money, you can still avoid payday loans and title loans. Even if you’re not eligible for a lower-cost personal loan through a bank or credit union, you will likely qualify for a no credit check installment loan. These loans have lower interest rates and longer terms than payday and title loans. And while payday loans do nothing to build credit, since payday lenders don’t report to the credit bureaus, keeping up with the payments on an installment loan helps strengthen your credit score, so you can start your journey towards a healthier financial future.

For more information on payday loans, scams, and cash advances and title loans, check out our state financial guides including CaliforniaIllinoisTexasFlorida and more.

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