Payday Loans vs Title Loans

Compare payday loans and title loans through zaving, understanding the differences and finding the right borrowing option for your needs.

Last updated by Zaving Editorial Team, on January 19th, 2024

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What is a car title loan and how does it work?

“A car title loan is a short-term financial option where individuals leverage their vehicle's title as collateral to secure a loan. To qualify, borrowers need to own the vehicle outright or possess substantial equity in it. The lender assesses the vehicle's value to determine the loan amount, which is typically a fraction of the car's appraised value. Upon approval, the borrower submits the vehicle's title to the lender and agrees to repay the loan within a specified timeframe, usually within 30 days, along with interest and associated fees.

These loans are often favored by individuals with poor credit, as the loan is secured by the vehicle, lessening the significance of credit history during approval. However, car title loans commonly entail high-interest rates, often exceeding triple-digit APRs, resulting in substantial repayment obligations.

If repayment defaults occur, the lender may repossess the vehicle to cover the outstanding loan amount. Successful repayment ensures the borrower retains ownership of the vehicle. While car title loans provide quick access to funds, they pose significant risks due to the elevated interest rates and the potential loss of the vehicle. Hence, borrowers should thoroughly assess their financial situation and repayment capabilities before opting for a car title loan.”

How are car title loans different to payday loans?

“Car title loans and payday loans have a number of differences:

  • Collateral: Car title loans demand the borrower's vehicle title as collateral, risking repossession if they default. In contrast, payday loans are unsecured, relying solely on the borrower's income and job status, requiring no collateral.
  • Loan amount: Car title loans typically offer larger amounts based on the vehicle's value, while payday loans are smaller, aligned with the borrower's income.
  • Repayment terms: Car title loans provide longer repayment periods spanning months to years, whereas payday loans necessitate repayment within a few weeks, often coinciding with the borrower's payday.
  • Interest rates: Both loans bear high-interest rates, yet car title loans might have slightly lower rates due to vehicle collateral. Payday loans may incur higher rates due to the absence of collateral.
  • Application process: Car title loans involve vehicle inspections and credit history checks. Conversely, payday loans have simpler applications, usually requiring proof of income and ID.
  • Risk of asset loss: Car title loans pose the risk of losing the vehicle if payments are missed. Payday loans, being unsecured, don't risk losing an asset but may incur extra fees or higher interest for late payments.

Understanding these distinctions is vital for borrowers to make informed choices aligned with their financial capabilities. Both loan types come with risks, necessitating a cautious approach and thorough consideration before borrowing.”

Can people with bad credit or no credit history access car title loans?

“Individuals with poor credit or no credit history can still secure car title loans, often marketed explicitly to this demographic. These loans leverage the borrower's car title as collateral, minimizing the lender's risk and increasing approval rates for those grappling with bad credit.

Car title loans hold appeal for borrowers with poor credit due to several reasons:

  • Simplified approval: Unlike conventional loans dependent on credit scores and income verification, car title loans primarily consider the vehicle's worth.
  • Speedy funding: Car title loans prioritize quick processing, often disbursing funds within 24 hours, catering to immediate financial needs.
  • Credit check exemption: Typically, car title lenders forego credit score assessments, enabling loan accessibility irrespective of credit standing.
  • Flexible payment terms: These loans often feature adaptable repayment plans, offering relief to individuals reliant on each paycheck.

Despite these advantages, recognizing the inherent risks tied to car title loans is crucial before committing, including steep interest rates, brief repayment periods, and the potential for vehicle repossession. Prospective borrowers, particularly those with poor credit, should thoroughly evaluate these factors to ensure their ability to manage the loan responsibly.

More of your frequently asked questions about payday loans

Which US states allow car title loans?

Car title loans are sanctioned in multiple U.S. states, but their regulations exhibit considerable variability and can undergo revisions. As of December 2023, the states permitting car title loans comprise Alabama, Arizona, California, Delaware, Florida, Georgia, Idaho, Illinois, Kansas, Kentucky, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, and Wisconsin. However, terms, regulations, and maximum loan amounts diverge significantly among these states. Some states implement stringent regulations, imposing caps on interest rates or loan amounts to protect consumers, while others afford lenders more freedom.

Can I get a car title loan if the vehicle is not fully paid off?

The possibility of securing a car title loan when the vehicle isn't entirely paid off might depend on the lender's policies. Some lenders might approve these loans by assessing the equity within the vehicle, even if it's not fully owned. However, this could result in a restricted loan amount, primarily based on the available equity after deducting the outstanding balance. For precise information on obtaining a car title loan in this scenario, engaging in direct discussions with potential lenders is recommended to comprehend their specific terms and conditions.

How quickly can I get a car title loan?

Securing a car title loan usually ensures prompt access to funds, often within a day of approval. However, the speed of obtaining this loan depends on various aspects, including the lender's processing timeline, the completeness of your application, the valuation of your vehicle, and meeting the lender's criteria. Promptly providing accurate information and necessary paperwork can accelerate the approval process, facilitating the swift release of funds.

What are the pros and cons of car title loans?

Exploring the realm of car title loans reveals both benefits and drawbacks. On the positive side, they provide swift cash access and are obtainable despite credit issues since they're secured by the vehicle's title. Moreover, some lenders might allow you to retain the use of your vehicle. However, these loans often accompany high fees and interest rates, amplifying the repayment burden significantly. Failing to meet payments could result in the loss of your vehicle. It's essential to assess these aspects thoroughly before choosing a car title loan, ensuring it aligns with your financial capacity.