Title loans and payday loans are both ways for consumers to receive quick cash when they’re low on funds. They both allow people with no credit, or bad credit to receive ready money when they’re unable to use a traditional bank to do so. Both title and payday loan companies target low income people, and people with less-than-stellar credit. However, there are key distinctions between the two programs.
If you own a vehicle without a loan on it, then you’re able to exchange your car title for cash. This is called a title loan, since the company is loaning you money against the current value of your vehicle. You sign over your title to the finance company. Your vehicle becomes the collateral for the short-term, high interest rate loan. The benefit for the borrower is that you can get cash fast, often in less than an hour, without a credit check. The only limitation is the value of your vehicle since the bank will only loan you a portion of the vehicle’s value.
A payday loan is similar to a title loan. The application process is fast, and there’s no credit check. The lender will usually verify employment to insure that you’ll have a pay date in the next few weeks, then it will loan you a percentage of your normal paycheck. A payday loan is also a high interest, short-term loan, but the collateral is a post-dated check payable to the lender which includes the amount borrowed, plus the interest charges and fees. But this is technically an unsecured loan, unlike the title loan. The lender will keep your check, and then you’re responsible for returning to the company to exchange the post-dated check for cash. If you don’t return, then the lender will deposit your check. As the borrower, you cannot let this check bounce, because that will incur even more fees, from both the lender and your bank. So it is in your best interest to pay it in person on your next payday. Since most people are paid every week or every two weeks, this ends up being a very-short term loan.
Again, the target market is low-income people who have bad or no credit.
With both types of loans, they can be rolled over into new ones. The problem is that many people are unable to afford the terms of the loan, and end up in a worse financial situation than they were in when they first entered into the loan agreement.
The best bet is for the borrower to never have to use either service. With careful budgeting, you’ll be able to afford your regular bills, and will be able to save for emergencies which happen. But if you do end up having to borrow from either type of lender, be sure to be an informed consumer and make sure you can afford the payment that will be due.