Payday loan vs title loan whats the difference

By Matt Mayerle
Modified on March 15, 2024
payday loan vs title loan

Do you need to borrow money and currently contemplating a payday or title loan? Payday loans and title loans both offer benefits like easy approval and quick funding, but they both can come with detrimental financial side effects. 

Here, you’ll learn more about the differences, as well as the pros and cons of title loans vs. payday loans. Once you have all the essential information about both funding options, you can decide which one is best for you. You may even learn that there are better funding alternatives available! 

What Is a Payday Loan?

A payday loan is a short-term, unsecured form of funding. The purpose of payday loans is generally to provide people with extra cash while they are in between paychecks. Many people turn to quick payday loans because they have minimum qualification requirements and a fast turnaround time. 

You can often apply, receive approval, and receive funding for a payday loan in a few hours or even minutes. But, the high-interest rates that come with payday loans may leave borrowers paying well after their next paycheck. 

Interest rates are an extra charge lenders impose on borrowers to make up for the financial risk they take by lending money. The lower your interest rate, the less money you will have to pay during your loan. 

Unfortunately, payday lenders typically charge extremely high-interest rates. Borrowers who fail to pay back their loan within about two weeks or less are stuck with these high rates while working to repay the loan. While you may not have to deal with these rates if you completely pay off your payday loan early, this can be extremely difficult to do. 

Furthermore, since payday loans are short-term loans, they usually only come with very low loan amounts. And so, these loans are probably not the best choice if you need a significant amount of money to take care of your expenses. 

What Is a Title Loan?

Car title loans are also a short-term form of funding, but unlike payday loans, title loans are secured loans. Title loans can also go by a few different terms, such as: 

  • Auto title loans.
  • Auto equity loans.
  • Pink slip loans. 

With an auto title loan, the borrower will give the lender their vehicle title, where the lender will then sign onto the title as a lienholder. Being a lienholder means that you own the vehicle. Funding amounts for title loans tend to be heavily based on the value of the borrower’s vehicle. People applying who own an expensive vehicle are more likely to be approved for higher loan amounts than applicants with less expensive cars. 

While the title loan lenders partially owns the borrower’s vehicle during a title loan, the borrower is able to keep their vehicle while they repay. This way, they have access to their car to use like normal. 

Similar to a payday loan, title loans are also short-term loans with low funding amounts and high-interest rates. Also, if you miss a payment or default on your title loan, your lender may potentially repossess your vehicle. 

If your vehicle gets repossessed from a title loan, it is usually taken to a secure impound lot. Your vehicle will then be stored at the impound lot until you become current on your title loan payments. 

What Is a Car Title Loan vs. a Car Title Pawn?

Don’t get a car title loan confused with a car title pawn! While borrowers keep their vehicle during a title loan, borrowers must give up their vehicle for a car title pawn. With a car title pawn, you would visit a pawn shop and have the owners appraise your vehicle. They will then give you a funding amount. If you choose to go ahead with the title pawn, you will provide your vehicle to the pawn shop owner in exchange for funding. From there, you can get your vehicle back after you have paid back the pawn shop owner. If you miss a payment or default on a car title pawn, the pawn shop owner can sell your vehicle to someone else. 

Unsecured vs. Secured Debt

Any loan type can be organized into two categories: unsecured and secured debt. Unsecured debt also called an unsecured loan, is funding that does not require collateral. Instead, borrowers look at financial information such as the borrower’s credit score or income to determine loan approval, funding amounts, and other loan details. Unsecured loans like payday loans pose a no risk of losing personal property since they require no collateral.

With unsecured loans, people with higher incomes and credit scores are more likely to high loan amounts, and lower interest rates. 

Secured debt, also called a secured loan, is funding that requires collateral. Collateral is a valuable asset borrowers use to secure loan funding. Since secured loans use collateral, this type of funding is often more accessible to people with poor credit, no credit, or past bankruptcy. If you are unwilling to deal with the possibility of losing personal property, you should not consider secured loans. 

Which Is Better? Title Loans vs. Payday Loans

So which option is the better loan, a title loan or a payday loan? While both loan types come with perks like quick cash and easy-to-meet approval requirements, they also come with inconvenient interest rates and payback terms that do not always set borrowers up for success. 

Both title loans and payday loans are known for having extremely high-interest rates, leaving you in a stressful debt cycle. 

High rates also put you at risk of missing payments or defaulting on your loan. Unfortunately, late payments and loan defaults can have a significant impact on your credit reports. Just one missed payment can harm your credit history for up to seven years. Along with a decreased credit score, missing payments may also lead to wage garnishment, where lenders forcibly take money directly from your bank account. These forced charges may leave you vulnerable to bank account overdrafts, further lowering your score. 

Better Funding Alternatives 

You may want to ditch the payday and title loans altogether and use a better funding option. There are plenty of positive funding alternatives that may work better for your budget and your credit. 

Credit Builder Loans

For people with bad credit, credit builder loans are a great option. Certain kinds of personal installment loans, also called credit builder loans, offer funding to people with less than perfect credit. These loans come with personalized repayment terms designed to work with the borrower’s unique budget. You can often find credit-building loans with a direct lender or credit union.

Personal Loans

Personal loans are available for good or bad credit depending on where you go. For example, online lenders offer more flexibility than a bank would. A personal loan can come with decent interest rates, steady repayment, and various loan amounts. And so, they are a great alternative to payday loans and title loans.

Get Extra Money Without a Loan

There are also ways to get extra money without having to apply for a loan at all. Some options to consider are: 

Tips for Paying off Payday Loan or Title Loan Debt

If you already have a payday or title loan, you are probably looking for ways to pay it off as soon as possible. Check out some tips below for getting rid of loan debt. 

Set up Automatic Payments

Automatic payments can make loans much easier to repay. The way autopay works is funds are directly taken out of your bank account. You can often schedule the date of your automatic payments to be any time on or before the due date. With this kind of flexibility, you can schedule automatic payments on days when you receive a paycheck to ensure you always have sufficient funds.

Refinance Your Loan Debt

If you find your current payday loan or title loan deal unbearable, you should consider refinancing your title loan or payday loan with a new loan. When you refinance, you can often get better rates, more time to pay, and even additional loan funding! 

Applying for a loan refinance works similarly to applying for any other loan. Simply fill out an application, work with a lender, and receive your money. However, before you commit to a loan, make sure you do research first. Look at multiple lenders to see who can offer you the best deal instead of going with the first option you come across. 

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