Personal Loans vs. Payday Loans vs. Title Loans
Trevor Mahoney is a financial services writer and content creator based out of Los Angeles, California. He holds a Bachelors of Science in Finance from Santa Clara University. In his free time, he enjoys hiking and lounging on the beach.Read full bio
At a Glance
When considering different forms of financing, there are three common types that you may run into: personal loans, payday loans, and title loans. Each of these are unique loan types, with standout features that make some better than the others, for you to consider. Never settle on a single loan type before evaluating all your options.
In this article, you’ll learn:
- What are personal loans?
- How do personal loans work?
- Pros and cons of personal loans
- What are payday loans?
- How do payday loans work?
- Pros and cons of payday loans
- What are title loans?
- How do title loans work?
- Which is better, payday loans or title loans?
- Key differences between personal loans, payday loans and title loans
What are personal loans?
Starting with the first and most common loan type, personal loans are an effective form of financing that can give you access to funds quickly. Personal loans are a lump sum of money that are given to a borrower by a lender in return for monthly repayments that encompass an interest rate and potential fees.
Personal loans will typically have interest rates ranging from 6-36% and a repayment period ranging from two to seven years. Depending on factors such as your credit score, credit history, income level, and more, a borrower may qualify anywhere within these ranges.
Taking on a personal loan can allow you to receive funds quickly.
Gain access to funds you need upfront with personal loans.
How do personal loans work?
Personal loans have a relatively simple and straightforward structure that is easy to follow:
- Determine the amount you need to borrow from the personal loan.
- Research different lenders and take prequalification surveys to see different loan terms.
- Select a lender who offers the best terms for the loan you seek.
- Apply for the loan.
- Receive the funds and apply them to whatever purpose you need.
- Begin monthly repayments that include any interest and fees.
Avoid missing any payments on your loan to ensure that your credit score doesn’t suffer rapidly as a result.
Pros and cons of personal loans
There are several pros and cons to consider when evaluating whether a personal loan is right for you. Here are some of the most prominent ones to think on:
What are payday loans?
Payday loans are one of the riskiest loan types a borrower can consider taking on. This loan type offers short term cash to a borrower in exchange for a postdated check that is usually dated for your next payday. The amount of the loan is typically what you need to borrow including any fees. The problem with payday loans is that if you do not come up with the funds by the date on the postdated check, it will still be deposited.
How do payday loans work?
The payday loan trap is easy to fall into when you need cash fast, particularly due to how easy it can be to secure a payday loan. Here is the general process of how payday loans work:
- A borrower approached a payday lender needing a certain amount of cash.
- The borrower writes a check for that amount, postdated to a certain time, that includes any fees (typically the equivalent of an APR above 400%).
- Funds are given to the borrower right away.
- If the check bounces when the lender deposits it at the due date, the lender will roll the current loan into a new loan.
The above process can result in a cycle of debt that can quickly cause any person to become overwhelmed with the amount of debt that accrues.
Pros and cons of payday loans
As you likely guess based on the above process, there are a few factors to consider before taking out a payday loan. The only pro of a payday loan is that you can gain quick access to cash. The cons of payday loans are far more extensive. These include, but are not limited to:
- Abnormally high APR rates, sometimes exceeding 400%.
- Small loan amounts.
- Short repayment period, typically being required by the borrower’s next payday.
- Some lenders are predatory and will aim to allow you to fall into a cycle of debt.
- Lenders may have account access.
- There is no potential positive effect on your credit.
What are title loans?
A title loan is a secured loan that allows the borrower to use their car for collateral. They are risky but can be helpful for a small group of people who are in a pinch and capable of repaying everything quickly. Title loans also allow a borrower quick access to cash, but hold the title of your car, or another similar asset, as collateral.
Due to the presence of collateral, loan amounts for title loans can reach as high as $10,000. Most loan repayment terms are 30 days, and if you cannot repay the loan in time then the lender may repossess your vehicle.
How do title loans work?
Title and payday loans work very similarly considering they are both short-term loans. Here is the process you can expect should you ever decide to apply for a title loan:
- Determine the loan amount you need.
- Find a title loan lender who is willing to offer you fair and reasonable terms, keeping in mind that most title loans will have average APRs of 300%.
- A lender will determine your loan amount by evaluating the worth of your collateral, typically 25-50% of the value of your vehicle.
- You will receive your funds.
- Repayment will be required, or your vehicle will be repossessed (in some cases a lender may be willing to roll your old loan into a new loan).
Which is better, payday loans or title loans?
When looking at a title and payday loan, it’s essentially choosing between the lesser of two evils. When learning about title loans and payday loans, remember the fact that interest rates for both will typically vary from 300-400% on average. Payday loans usually have a tighter repayment period of just a couple weeks, but the repayment amount is also smaller than that of a title loan.
Title loans can likely be considered worse, however, since collateral is required, and an extremely large amount can be borrowed with an average 30-day repayment period.
Key differences between personal loans, payday loans and title loans
Beyond a title loan, the difference between payday loans and personal loans is night and day. Learning more information on personal loans, as well as the other two types, will show some standout differences:
|Personal Loans||Payday Loans||Title Loans|
|Repayment Period||Long term||Short term||Short term|
|APR||6%-36%||Up to 400%||Up to 300%|
|Loan type||Unsecured, Secured||Unsecured||Secured|
Yes, personal loans are typically better than payday loans. Besides having a more reasonable interest rate, especially if you have strong credit, personal loans also have a longer repayment period which allows you to make smaller payments on the lump sum.
There isn’t a limit to the number of payday loans you can have in most cases, but this is the trap that many lenders will hit borrowers with. As the number of payday loans you have increases, lenders may allow you to roll the loans together, but this is where the high interest rate of payday loans comes back to bit you.
Title loans will use the title on your car as collateral on the loan, meaning a title loan is secured. A payday loan is unsecured, however, and will have no form of collateral associated with it. Both are short term loan types. The interest rate of a title loan will likely be lower than that of a payday loan since it is secured.
A car title loan is by far the most common type. This occurs when the title of your car is used as collateral for the loan you are borrowing.