Personal Loans, Title Loans and Payday Loans: There's a BIG Difference!

When you search for personal loans (or signature loans or unsecured loans) online or in person, you’ll see advertisements for "personal loans with no credit check" or “bad credit okay!” Beware these phony baloney loans.

Bogus “Personal Loans”

Personal loans with “no credit check” are really cash advances, payday loans or title loans. The amounts you can borrow are relatively low, the terms are short (a week to a year) and the interest rates and fees are very, very high.

These lenders are exempt from many of the regulations that apply to banks, credit unions and credit card companies. They are able to charge triple digit annual interest rates in most states. Annual percentage rates of 250% or higher are common. When the loan’s term ends, you either pay it off or extend it (for additional fees, of course).

Title Loans

Title loans allow you to borrow money for a few weeks (typically 30 days). You sign over the title of your paid-for car as security. There's no credit check and only minimal income verification. If you can’t repay the loan as agreed, additional fees pile up and your car may be repossessed. People have lost $4,000 cars because they couldn’t repay $400 loans.

Payday Loans and Cash Advances

When you take out one of these (and you probably shouldn’t), you write a personal check payable to the lender for the loan amount plus the loan fees. The company gives you the amount of the check minus the fees, and holds the check until the loan is due, usually in a week or two. The fee is usually a percentage of the amount borrowed. The borrower is charged new fees each time the same loan is extended or “rolled over.”

These extremely short-term loans can be sneakily expensive. Say you want to borrow $200 for two weeks and the fee is $30 (this is typical). That doesn’t seem bad, about the same as a bounced check fee. But the annual percentage rate is almost 400 percent! And if you roll that loan over eight times (which according to several studies is what the average borrower does), it will cost you $480 to pay back a $200 loan.

Real Personal Loans

Personal loans (also called unsecured loans or signature loans) come with interest rates (as of July 2013) ranging from about five percent to about 30 percent (depending on your credit grade and the lender’s policies). Their terms range from 12 to 60 months. When you apply for a personal loan, you have to do more than fog a mirror and show your driver’s license. You complete an application, provide bank statements and pay stubs (and perhaps tax returns and W-2s), and the lender pulls your credit report and underwrites your loan.

If your application is approved, you’ll get your money and begin repaying it in regular monthly installments.

Note that even “legitimate” personal loans come in a wide range of interest rates. So even borrowers seeking reputable financing should shop wisely and compare quotes from several competing lenders.

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