How Do Title Loans on Your Car Compare to Payday Loans?

Car title loans and payday loans both charge high interest rates and service fees, according to Investopedia. However, one difference between the two types of loans is that payday loans do not require any collateral, whereas car title loans require a borrower to produce the title to his car to secure the loan.

Lending companies that offer car title loans provide financing based on the wholesale value of the consumer’s vehicle, explains Investopedia. The lending company then determines the amount of the loan based on what it believes the vehicle is worth. Most title loan companies require that a borrower owns his car outright before providing any type of financing.

Payday loans require consumers to write post-dated checks for the amount of the loans plus additional fees and interest, states Investopedia. The borrower then receives money right away, and when his next payday arrives, the lenders cash the post-dated checks. The drawback is that most payday lenders charge 200 to 500 percent annualized interest, as of 2015. Payday lenders call interest charges “service fees” to avoid limits imposed by the federal government on the amount of interest they can charge. Car title loan companies are in a different category than commercial banks and are not subject to usury laws, which allows them to charge higher interest rates.