Payday loans vs. Title loans: How can you get out of them?

When you ask which is better, payday loans or title loans, you ask which disease is better, pneumonia or influenza. That's because both of them are nothing but harmful diseases.

There are times in our lives when we need quick cash. During these times, we look to options like payday loans and title loans because they are easy to get. But what we forget or don’t consider is that they are predatory lending processes that turn into an unending cycle of debt.

These loans share the same characteristics of exorbitant interest rates, unfair terms, and potentially abusive collection practices. Therefore, it becomes difficult to repay the debt.

Let us find out more about title loans and payday loans in detail:

Payday loans

Payday loans (also known as cash advances) are short-term loans that have high costs. A payday loan is unsecured, as it does not require any collateral in exchange for the funds. Borrowers typically take out loans ranging from $500 to $1,000.

These loans are said to be short-term because borrowers are usually asked to repay the loan by paycheck from their next payday. Most borrowers opt for payday loans because they are easy to secure. They can get a loan approval without credit checks or credit scores.

Most individuals opt for a payday loan because of a financial emergency. Financial experts ask borrowers to be cautious when taking out a payday loan, as they can become burdensome if not repaid on time.

How does a payday loan work?

You can easily apply for a payday loan online or from storefront vendors. The lenders usually verify your credentials, bank account information, and proof of income. After the verification process is complete, they ask for a signed postdated check or permission to withdraw the funds electronically from their checking accounts.

A payday loan is typically taken out for a short period, like two weeks to a month. The majority of them are based on when you receive your paychecks. Hence, the name “payday” loan.

You can repay the loan by going to the store where you purchased it or paying it online from the website you used to secure your loan. If you do not pay it on time, the lender can withdraw the money plus interest directly from your bank account.

What is the cost of a payday loan?

Payday lenders usually charge around $10 - $30 for every $100 lent. So if they charge $15 for a $100 loan for two weeks, the average interest rate is around 390%.

Moreover, if the loan is not repaid on the due date, more fees are added, and the borrower is forced to roll over to a new loan, which turns into a cycle of debt. The borrowers may end up owing more than the borrowed amount in just a few months.

Title loans

Like a payday loan, a title loan is a short-term loan, but it is considered a secured one because you use your vehicle as collateral. They are called car title loans, auto title loans, auto equity loans, and pink slip loans.

The amount borrowed through a title loan is considerably larger than a payday loan, which can go up to $10,000. These loans are typically short and last about 30 days. You take out the loan against the title of your car.

However, the loan depends on the current value and state of the car. During this time, title lenders hold your car title and can be considered the owner.

"Your car's title secures title loans. This means that if you default on the loan, the lender can seize your car. However, because collateral secures title loans, they typically have lower interest rates than payday loans.", said Cliff Auerswald, President of Reverse Mortgage

How does a title loan work?

There are a couple of different types of car title loans. Some loans require the total amount plus interest to be paid back in one lump sum within a month or so. Others, on the other hand, can be paid as installment loans over three to six months.

You can apply for a car title loan online or in person, but your car must be appraised. The lender will also require a clear title, proof of insurance, spare keys, and identification. No credit check is required. Your car stays with you during the loan's repayment period, but if you default, the title lender can take it.

How costly are title loans?

Title loans tend to charge a monthly finance charge of 25%, which works out to an annual percentage rate of 300%.

The value of your car serves as collateral for a car title loan, similar to how your home secures a mortgage. To get your car back, you must pay off the loan in full, including the lender's astronomically high fees.

Even if you pay back your $1,000 loan in 30 days, you'll still have to fork over $250 in interest. The loan could cost you a fortune if you are late with your payments and have to pay late fees. Losing personal property can also be caused by late payments.

Title loans vs. payday loans: What are the key differences?

Payday loans

  • It is an unsecured loan. Therefore you do not need any asset as collateral.
  • They charge extremely high-interest rates. They can go as high as 600%
  • Most of the time, people take them out to cover unexpected expenses or quick cash needs.
  • Depending on your state, you can typically borrow $50-$1000 with a payday loan.
  • Payday lenders can use harsh debt collection tactics to get their money.

Title loans

  • They are secured loans. Therefore it requires collateral.
  • They charge exorbitant interest rates but are lower than the interest rate payday loans pose. The APR charges can go as high as 300%
  • They are used to get quick large amounts of money.
  • Depending on the value of the borrower's vehicle, they can borrow 25-50% of the value. That can round up to $50-$10,000
  • If you default on the loan and have late payments, title loan lenders can seize your car as payment for the loan.

How can you get out of debt like this?

Payday loans and title loans are predatory lending practices that make people fall into debt traps. If managed properly, it can be easier to get out of this type of debt because it tends to become overwhelming.

Here are a few things you can do to pay off payday and title loans:

Debt consolidation

You can consolidate payday loans in two ways:

Debt consolidation loan

A debt consolidation loan is a loan that can be used to pay off multiple debts. Debt consolidation loans typically combine several smaller loans into one large one. However, you can choose which debts to merge into one manageable payment.

However, debt consolidation is only a good solution if you have good credit scores. Because of your bad credit scores, you may end up with high-interest rates.

You can even use personal loans as debt consolidation loans to borrow money. You can easily apply for one from a credit union, bank, or online financial institution. A debt consolidation loan can be a good option to pay for title loans.

Debt consolidation program

Payday loans can be repaid using a debt consolidation program or a payday loan debt consolidation program. A payday loan consolidation program can assist you in consolidating all of your debts into manageable monthly payments. Credit counselors from non-profit and for-profit organizations can assist you in enrolling in this program.

With a debt consolidation program, you can consolidate storefront and online payday loans. Credit counselors work to understand your debt and contact your payday lenders. They negotiate with your creditors to reduce your interest rate and get better, more affordable terms.

Debt settlement

Debt settlement is another option to help get rid of your debt. When you settle your debt, you negotiate with your creditors to pay back a portion of the original debt in exchange for canceling the remaining balance.

A credit counselor from a non-profit or for-profit organization can help you negotiate a debt settlement agreement with your loan providers. These organizations provide payday loan settlement services. They negotiate with your creditors on your behalf for a settlement agreement where you pay only a portion of the amount you owe.

Request a repayment plan

Because of the high-interest rates, individuals will most likely have an overdrawn budget due to their monthly payments. Some states require payday loan providers to offer a grace period during which borrowers can repay their loans without incurring additional fees or penalties.

However, state regulations differ, and your lender may be able to impose a fee on you if you request a repayment plan.

Refinance your loan

With the help of a refinance loan, you can pay off your debt quickly and get back your vehicle's title. If you have improved your credit score since taking out your car title loan, you may now be eligible for a loan with more favorable terms, such as lower interest rates and fees.

However, a refinance loan is not a good option if you do not have good credit.


The last resort to getting rid of your debt is to file for bankruptcy. With Chapter 7 bankruptcy, you can discharge most unsecured debts, like payday loan debt. However, you cannot discharge a title loan debt, as it is a secured loan.

Through Chapter 13 bankruptcy, you can discharge unsecured debts, but you can get a much more affordable payment plan to manage your secured debts. In chapter 13, bankruptcy, you can get a lowered monthly payment, and your interest rates would also be reduced if they are extremely high.

Bottom line

A payday or title loan is dangerous because of the high-interest rate and the risk of losing your car. Most people take out this type of loan due to financial emergencies. It is a good way to get cash, but it hurts your credit score and puts a bad mark on your credit history.

Financial trouble is a common issue that everyone faces. But we should be careful when we are strapped for cash and not fall into debt. Moreover, as per federal law, payday and title loans are banned in Arizona, Arkansas, Connecticut, Georgia, Illinois, Maryland, Massachusetts, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, South Dakota, Vermont, and West Virginia. You should always look for alternative ways to borrow money where you can get favorable terms and the lender abides by the Fair Debt Collection Practices Act (FDCPA).

  • expertise badge
  • TrustLink logoTrustLink logo
  • Customer ratings on BBB
  • IAPDA logo
  • Calchamber Member
  • Calbar Registered
  • D&B
  • Trustpilot
  • yelp logo