Payday Loans vs Title Loans
Inside Subprime: Dec 10, 2018
By Jessica Easto
Payday loans and title loans have a lot in common. For one thing, they are both forms of predatory lending—in which loan providers use deceptive practices and unfair loan terms to take advantage of borrowers. These types of loans can leave you with an unmanageable cycle of debt and bad credit. The Center for Responsible Lending (CRL) reports that payday loans and title loans collectively cost borrows $8 billion in fees each year. Let’s take a closer look at the similarities and differences of how they do this.
Let’s start with the similarities. Both payday loans and title loans are marketed as solutions for people who need money quickly and have few other options due to factors such as bad credit. In other words, they both tend to prey on vulnerable populations. That’s why title loans are illegal in 29 states and payday lending is banned or severely restricted in 18 states.
Both types of loans offer relatively small amounts of cash (usually a few hundred dollars) with terms that require it to be paid back in a short amount of time. Most payday loans require you to pay in full by your next paycheck (usually within two weeks), and most title loans require repayment within 14 to 30 days.
Both payday loans and title loans have exorbitantly high annual percentage rates (APR)—300 to 400 percent is typical. Compare this to a typical APR for a mortgage (around 5 percent) or even a credit card (<20 percent), and you’ll start to get the picture.
Now for the key difference. In order to get a payday loan, you must present your lender with a postdated check, which allows them to recoup the cost of the loan on your next payday when they cash it. (This is why these loans are often called “cash advances.”) If you don’t have enough money in the bank at that time, you may incur overdraft fees. On the other hand, title loans are secured by your vehicle. The amount you get depends on your car’s value. But this also means the lender can repossess your car if you can’t repay the loan. You could lose your car!
How often does this happen? A lot. According to the CRL, one in five borrowers have their car repossessed. In order to avoid this, borrowers are often presented with the option to “rollover” their loans so that they have more time to come up with the money—for additional interest and fees, of course. Payday lenders offer the same option, leading to a cycle of debt and that astounding $8 million figure.
According to the CRL, title loan borrowers “flip” their loan an average of eight times, paying as much as $2,300 in fees on a $1,000 loan. On the payday side, borrowers were indebted an average of 212 days the first year of their loan—a far cry from the 14-day term on the original loan.
The bottom line? Both payday lenders and title loan lenders depend on borrowers’ debt rollover to line their wallets. It’s worth noting that the “fee bleed” associated with these two types of loans varies greatly depending on what state you live in. Those that enforce more lending regulation bleed less.