Car Title Loans vs. Payday Loans

September 23, 2011

Car title loans and payday loans are often grouped together and considered to be the same type of financing. This happens for several reasons, including the fact that both car title loans and payday loans provide options for people who might otherwise be shut out from borrowing money from traditional credit based lenders such as banks and credit unions. In some situations, the same lenders also offer car title loans and payday loans, creating a further blurring of the line between these two forms of borrowing. In reality, however, car title loans and payday loans are not the same thing and there are some significant differences you should be aware of so you can make the right borrowing choice for you.

Understanding the Differences Between Car Title & Payday Loans

Payday loans are loans granted on the basis of proof of steady employment. The premise of payday loans is that you must repay the money you borrow the next time you get paid. Often, with a payday loan, you must give the lender access to your bank account or write a post-dated check that can be cashed on the date of your next payday. In these loans, your income is the deciding factor as to whether you may borrow money.

Car title loans operate differently. Like payday loans, your credit score is not very important (and often not even checked at all) when you take out a car title loan. However, instead of your income being the primary factor when it comes to a car title loan, the value of your vehicle is the essential qualifying requirement. Almost any vehicle can be used, but you must turn over the title of your vehicle when you take a car title loan. The vehicle thus guarantees the loan and the lender uses that as the security to reduce the risk of losing money if you do not pay your payments,   If you default on your obligation then the lender may repossess and sell the car to recover the money lent. That is why for a car title loan, your income is not nearly as important (although you may still need to show that you have some source of funds to be able to make the agreed upon payments).

Whether a car title loan or a payday loan is the right choice will depend upon your personal financial situation. If you do not own a vehicle, then a payday loan may be a better choice. If you do have a car, on the other hand, a car title loan allows you to easily borrow more money for a longer period of time and at a significantly lower interest rate than a payday loan. Further, because you still get to drive the car as you repay the loan, there is nothing to lose by taking a car title loan as long as you can make your payments as agreed.