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Payday loans vs car title loans

Henry Githinji

Henry Githinji

Henry plans to be an entrepreneur with his own financial consultancy firm, specializing in in binary options and stock trading. Henry is a day trader and plans to use the capital he makes to launch his business. He plans to build a portfolio that attracts investors through his trading performance.
Henry Githinji

Payday loans vs car title loans

auto-title-loans-vs-payday-loans-which-one-should-you-choose

auto-title-loans-vs-payday-loans-which-one-should-you-choose

Payday loans and car title loans are considered easy ways out of emergencies. However, both have interest rates which are higher than most traditional loans. In this article, we will compare these two types of loans. You will realize that there are quite a lot of differences in interest calculations and repayment arrangements.

Payday loans and their interest rates

Payday loans typically require you to repay once you get your next paycheck. Their interest rates are very high, especially when you borrow short-term payday loans. According to studies done by the Consumer Financial Protection Bureau, about 5% of American adults use payday loans to service their emergencies and other kinds of monthly payments compared to about 2 million adults who use car title loans to do the same, the number translating to about 1% of the American adult population.

payday-loan-credit-score

payday-loan-credit-score

Here is a simple illustration of the payment arrangement of payday loans. For a payday loan, the Annual Percentage Rate (APR) ranges from about 400%. This is really high – higher than other short-term loans. If you want to borrow a $100 payday loan for about 2 weeks, it would cost $15 to $30 to borrow the loan. This amount hasn’t included the processing fees yet. So for a $100 payday loan with an APR of 400%, you will probably be repaying an amount not less than $400.

Car title loans and their interest rates

Car title loans are operational in about 25 states in the US which translate to about 2 million borrowers a year. Interest rates of car title loans are around 300% APR. This is a little lower than the APR of payday loans. However, not everybody has a car to put up as collateral for a car title loan. Should you want to take up a car title loan of about $400, the average interest charged is about 24%-26% of the total cash borrowed according to the Federal Trade Commission. Thus, the interest will be about $100. With additional processing fees, the total cost of borrowing a $400 car title loan amounts to $625.

Hence, car title loans are cheaper to obtain than payday loans. However, statistics from the Pew Charitable Trusts shows that payday loans are more popular than car title loans.

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