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The Difference Between Personal Loans, Payday Loans and Title Loans

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Financial hiccups happen to everyone: You may end up with an unexpected medical bill, come up short on rent or break your cellphone and need to buy a replacement. When an unbudgeted expense or shortfall pops up, you might think about turning to a loan.

But when you need funds quickly or when your credit is damaged, you may find yourself stuck with high interest rates and fees. To help you better understand your options for a quick loan, let’s look at three financial products: personal loans, payday loans and title loans.

Overview of personal, title and payday loan differences

  • Personal loans traditionally come with a fixed interest rate and set repayment term. Your loan term may be between 24-60 months. Rates will largely be based on your credit score and credit history, and can be as low as single digits or as high as triple digits. Fees vary by lender.
  • Payday loans are for small debts and come with incredibly short terms, usually about two weeks. Interest rates are commonly in the triple digits. Payday loans are usually easier to qualify for than personal loans but may come with higher fees that can make it easy to fall into a debt cycle.
  • Title loans are short-term, high-interest loans where the title of your car is used as collateral. The amount you can borrow is based on the value of the car and the repayment term may be 15 or 30 days. Rates can be in the triple digits.

Of the three types of loans, personal loans are the most traditional. You can borrow a larger amount of money and you have more time to pay, usually two to five years. Personal loans usually have fixed interest rates typically ranging from 6.00% to 36.00% versus 10 times higher for a payday or title loan. However, unlike with those loans, your credit score matters. Some lenders offer personal loans for people with bad credit, though you may end up with a triple-digit rate.

Because of their short repayment periods, payday loans are very expensive. You might get just two weeks to pay off the loan. Most payday loans are small, averaging about $500. Payday lenders won’t check your credit, but you’ll need proof of income.

With a title loan, the main requirement is your car title. If you don’t repay the loan, your car could be repossessed. Depending on how much your car is worth, you can borrow much more than with a payday loan. Most title loans are for 25 to 50% of the car’s value.

It’s important to compare all the factors — APR, repayment time and fees — to know how much these loans will really cost you. With payday loans and title loans, many states have their own rules and restrictions, so check your local laws.

What is a personal loan?

  • Application requirements: Credit check, proof of income, bank account and ID.
  • Interest rates: 6% to 36% APR
  • Loan amounts: $500-$50,000
  • Repayment terms: 2 to 5 years with fixed monthly payments
  • Loan availability: Allowed in every state.
  • Credit impact: You can build your credit by making timely payments, but missed payments will hurt your score.
  • What happens if you default: Your credit score will take a big hit, and you will likely end up in collections and/or possibly sued for the debt.

Personal loans can come from a variety of lenders: traditional banks, credit unions and online lenders. A traditional personal loan is a fixed rate loan you pay off monthly over a 24- to 60-month term. Some lenders may offer shorter or longer terms.

The amount you can borrow for a personal loan varies by lender. One lender may offer loans for between $500 and $25,000, whereas another may lend a minimum of $2,500 and a maximum of $35,000. Fees also vary by lender. Some lenders don’t charge any fees.

Unless you opt for a secured personal loan, you won’t need to put down collateral, like your house or car, to qualify for the loan. To be approved, you’ll likely need good credit. The better your credit score, the better your interest rate may be. In 2018, the average APR for borrowers with a credit score of 720 or higher, for example, was 7.09%. For those with a score less than 560, the average was 135.94%.

What is a payday loan?

  • Application requirements: Proof of income, bank account and ID.
  • Interest rates: $10 to $30 fee for every $100 borrowed. APRs often are 400% or higher.
  • Loan amounts: Many states cap the amount at $500 or less.
  • Repayment terms: 2 weeks. You can roll the loan over but will be charged an additional fee each time.
  • Loan availability: Allowed in all states except Arizona, Arkansas, Georgia, New Mexico and North Carolina. Also prohibited in Washington, D.C.
  • Credit impact: Most payday loans aren’t reported to the credit bureaus so your score won’t be impacted by making or missing payments. If your debt ends up in collections or you are sued, then it will hurt your score.
  • What happens if you default: Your debt could go to collections and/or you could be sued.

A payday loan is a small, short-term loan that’s secured by either giving the payday lender a postdated check or authorization to debit your bank account. You’ll be expected to pay off the full loan, plus a fee at the end of the term, which might be as short as 14 days.

Fees can range from $10 to $30 for every $100 you borrow. If you can’t repay the loan when it’s due, you can roll it over but you’ll have to pay another fee. That’s pretty common: 80% of all payday loans are followed by a rollover or another loan within 14 days, according to the Consumer Financial Protection Bureau.

What is a title loan?

  • Application requirements: A car title, an ID and proof of insurance.
  • Interest rates: Average fee of 25% of the amount borrowed.
  • Loan amounts: 25% to 50% of the car’s value.
  • Repayment terms: 30 days. You can roll the loan over, but you’ll be charged additional fees and interest.
  • Loan availability: Allowed in 17 states — Alabama, Arizona, Delaware, Georgia, Idaho, Illinois, Mississippi, Missouri, Nevada, New Hampshire, New Mexico, South Dakota, Tennessee, Texas, Utah, Virginia and Wisconsin. Some other states technically allow title loans through loopholes.
  • Credit impact: Title loans aren’t reported to the credit bureaus so you can’t help or hurt your credit by making or missing a payment. But a repossession would show up on your credit report and hurt your score.
  • What happens if you default: The lender can repossess your vehicle.

A car title loan is a small, short-term loan (usually due in 30 days) where your vehicle acts as the collateral. The loan comes with a monthly fee that might be as high as 25% of the amount you borrow. If you default on the loan, the lender could take your car. Between 6% and 11% of people who take out a title loan have their car repossessed, according to a 2015 report from The PEW Charitable Trusts.

Alternative funding options

If your credit isn’t good enough to qualify for a personal loan, and you want to avoid the risks of a payday loan or title loan, you have other options for fast funding.

First, consider the people around you. Can you borrow money from a family member or friend? Would you feel comfortable asking your employer for an advance on your paycheck? Is it a good idea to write up an agreement even if the money is coming from close family?

If you’d rather not mix personal relationships and money, look into peer-to-peer loans. These loans are financed by investors through an online borrowing platform run by a third-party company. The investors either fund all or some of your loan request. The interest rates are usually very reasonable.

In some cases, you might be better off charging what you need on a credit card or even taking a cash advance from your credit card. With a cash advance, you’ll be charged a fee and a lot of interest, but it will still cost you less than a payday loan.

Needing quick cash can happen to anyone. Just make sure you don’t pay a long-term price by taking out a loan that you can’t afford.


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