The difference between a payday loan and a title loan is that a payday loan is designed to last until your next payday, but a title loan requires you to hand over your vehicle title as collateral.
- Payday loans do not require the applicant to give the lender their vehicle title.
- Both types of loan are for relatively small sums of money.
- Neither loan is supposed to be a long term fix.
You never know when you might need to apply for some extra funding due to unexpected financial circumstances arising. With that in mind, it’s important to know the difference between the different types of financial aid available in order to make the most informed decision for yourself.
What Is a Payday Loan?
A payday loan is a type of loan whereby the borrower has access to a relatively small sum of money which is designed to last them only until their next payday.
It is supposed to help those who have not budgeted for unexpected circumstances, for example those who have emergency medical bills to pay. It is not designed for frivolous spending or any non-emergency payments.
In order to apply for a payday loan, the borrower will be required to show proof of income, a valid ID and a bank account.
What Happens If You Don’t Meet The Repayment Dates?
If you are unable to meet the repayment dates on your loan, it will automatically roll over onto the next month.
When you apply for a payday loan, it is with the understanding that you repay the loan upon receipt of your monthly income. If you fail to do so, the sum will continue into the next month with an additional charge.
In spite of this, most loans are not reported to the credit bureau. This means that taking out a payday loan will usually not impact your credit score.
Which States Allow Payday Loans?
Payday loans are permitted in all states across the US with a few exceptions. Payday loans are prohibited in Arkansas, Arizona, New Mexico, North Carolina, Georgia and Washington DC.
Many states therefore cap the amount at $500 in order to avoid excessive debt collection. Interest rates can vary between $10 and $30 for every $100 borrowed from a payday lender, whilst APRs are often in excess of 400%.
It is important to know the differences between loan types before applying
What Is a Title Loan?
A title loan, like a payday loan, is one which allows the borrower a short time to repay the loan, usually 30 days. In this instance, a title loan is considered a short term loan.
Title loans mean that the borrower must provide the title of their vehicle as collateral.
In order to take out a title loan, you will need to provide a car title, valid ID and proof of insurance.
What Happens If You Don’t Meet The Repayment Dates?
If you are unable to meet the repayment dates on your title loan, there is a chance that the lender will repossess your car. There is also a fee of around 25% when taking out a title loan, which is in addition to agreeing to surrender your vehicle title.
It is reported that between 6% and 11% of people who take out a title loan end up having their vehicle repossessed. This will then appear on your credit report and negatively impact your credit score, however if the loan is repaid on time, this will not be reported to the credit bureau.
When you take out a title loan, you will have 30 days to repay it before it rolls over with increased interest and additional fees.
Which States Allow Title Loans?
Title loans are currently allowed across 17 states in the US. These are Georgia, Idaho, Illinois, Alabama, Arizona, Delaware, Mississippi, Missouri, Nevada, South Dakota, Tennessee, Texas, Utah, Virginia, Wisconsin, New Hampshire and New Mexico, with some other states technically allowing title loans through loopholes.
Which Type Of Loan Is Best For Me?
When taking out a loan, it is important to consider many factors. Before making an application, you should always consider whether you will be able to repay your loan within the agreed timeframe.
This means budgeting in order to repay your loan alongside any potential fees or interest that doing so may incur.
In addition to this, it is crucial to weigh up which type of loan you wish to take out. If you do not own a vehicle, you will be unable to take out a title loan because you cannot provide the necessary documentation as collateral.
Payday loans and title loans are both types of short-term, high-interest loans, but they have some key differences:
What Is The Difference Between a Payday Loan and a Title Loan?
- Collateral:
- Payday Loan: Payday loans typically do not require collateral. They are unsecured loans, meaning borrowers don’t have to put up any assets as security.
- Title Loan: Title loans, on the other hand, require borrowers to use their vehicle title as collateral. If the borrower fails to repay the loan, the lender can repossess the vehicle.
- Loan Amount:
- Payday Loan: Payday loans are usually smaller in amount, ranging from a few hundred to a couple of thousand dollars.
- Title Loan: Title loans often allow borrowers to access larger amounts of money, depending on the value of the vehicle being used as collateral.
- Repayment Terms:
- Payday Loan: Payday loans are typically due on the borrower’s next payday, usually within a few weeks. They often come with high fees and interest rates.
- Title Loan: Title loans generally have longer repayment terms compared to payday loans. However, they also come with high interest rates and fees, and failure to repay can result in the loss of the vehicle.
- Application Process:
- Payday Loan: Payday loans are usually easier to qualify for and have a simpler application process. Borrowers typically need to show proof of income and have an active bank account.
- Title Loan: Title loans require the borrower to own the vehicle outright and provide the title as collateral. Lenders may also assess the value of the vehicle before approving the loan.
- Risk of Losing Collateral:
- Payday Loan: Since payday loans are unsecured, borrowers don’t risk losing any collateral if they default. However, they may face consequences such as damage to their credit score and additional fees.
- Title Loan: With title loans, there’s a significant risk of losing the vehicle if the borrower defaults on the loan. Lenders can repossess the vehicle and sell it to recoup the outstanding balance.
In summary, while both payday loans and title loans offer quick access to cash, title loans require collateral and typically involve larger loan amounts, but they also come with the risk of losing the collateral (the vehicle) if the borrower fails to repay the loan.
