Title Loans vs. Payday Loans: Which Are Better?

Asking if title loans or payday loans are better is tantamount to asking which illness is best to come down with. Both loan products feature usurious interest rates, unfavorable terms and aggressive collection tactics that border on abusive, and both subject you to dealing with unscrupulous characters, often in less-than-stellar parts of town. Title loans typically offer lower interest rates — for example, a 300% annual percentage rate (APR) versus 400% for payday loans, if you call that a deal — but also impose worse penalties for nonpayment, as the lender can take ownership of your vehicle.

Payday lenders offer short-term cash loans in exchange for a postdated check, usually dated for your next payday. The amount of the check includes the loan total and a finance charge. For example, you write a check for, say, $115 to receive a $100 loan. Given a two-week loan term, which is fairly standard, the $15 finance charge works out to an APR of nearly 400%, and this assumes you pay back the loan on time.

If your postdated check fails to clear the bank and you do not make other arrangements to pay by your due date, the lender rolls your loan into a subsequent two-week term, tacks on another finance charge, and typically assesses an additional late fee or penalty. In short order, you could be on the hook for several multiples of your original loan amount.

The only silver lining of a payday loan is that it is unsecured debt, which means the lender has no collateral to seize if you are unable to pay the loan back. Consequently, payday lenders are known for using aggressive methods to collect late payments. These tactics include incessant phone calls, intimidating letters and threats of litigation. Some payday lenders reportedly employ "field chasers," representatives that show up at delinquent borrowers' homes to demand payment.

What's more, as payday lenders tend to prey on the poor and the desperate, their physical locations often are in undesirable areas of town. You can circumvent the need to go there by seeking a lender online, but doing so subjects you to another set of dangers; some payday lender websites are nothing more than scams to extract sensitive personal information.

Title lenders offer short-term loans while holding your vehicle's title as collateral. The lender appraises the vehicle's value and offers to lend up to a certain percentage of that value, usually 25 to 50%. Title loan balances can be much larger than payday loan balances, in some cases reaching as high as $10,000. A typical title loan term is 30 days, with the average interest charge around 25%. This means that a standard title loan APR is 300%.

Like payday lenders, title lenders impose the biggest expenses when you fail to repay the loan on time. If you are lucky, the lender might offer to roll the loan into a new 30-day term, levying a new finance charge and usually a penalty charge on top of that. If you are not so lucky, the lender may repossess your car and sell it to pay off your loan.

Also like payday lenders, title lenders are most often found in seedy neighborhoods. Obtaining a title loan generally requires you to show up in person, since the lender must appraise your vehicle. Mobile title lenders do exist but almost always charge extra to come to you.

Classifying one or the other as "better" is fraught with difficulty, as both payday loans and title loans tend to take a precarious financial situation and make it worse. Payday loans pose less risk of losing personal property, while title loans feature slightly lower interest rates (though still rapaciously high) and allow for larger loan amounts.

If facing an unexpected expense and low on funds, better methods to raise money include selling items you no longer need, asking your employer for an advance on your next paycheck or, if possible, using a credit card. While credit cards receive a bad rap for having high interest rates, their rates are a tiny fraction of what you end up paying for a payday loan or title loan. Moreover, most credit cards charge no interest at all if you pay them off within 30 days.