Auto title loans and payday loans are both short term cash advances made to borrowers facing momentary financial crisis. Unlike traditional bank loans or credit card loans, where an applicant has to go through detailed paper work, before he/she is ultimately sanctioned a loan amount, short term cash advance loans like a title loan or a payday loan does not take the borrower through any unnecessary paper work. One can simply apply for a loan and expect to receive it within 24 hours on the very same day. But which one would you find more reliable to opt for, when you are in dire need of cash? - Now that is the real question.

While the opinion here differs from one critic to another, nevertheless; the argument continues to revolve around whether a title loan is more safer to go for instead of a payday loans. But first, let's try to understand the difference between a title loan and a payday loan -

Auto Title Loans

Auto Title loans are short term loans that a borrower can apply for, keeping his/her car on lean. The loan amount is determined by the lender after analyzing the vehicle's actual value. The borrower has to submit the car's title and a set of car keys to the lender, but he/she can use the vehicle just like before. Once the borrower pays back the total amount due to the lender, he/she will get back the car's title.

Note: During the loan term of a borrower, the lender keeps the car title as a kind of security in case the borrower's vehicle meets with some kind of accident on the road.

Payday Loans

Payday loans on the other hand, require borrowers to place a lean on their paycheck. The lender determines whether the borrower has a stable income so that he/she can repay the total amount borrowed along with interest, on the expected pay dates. The borrower has to submit a post dated check or a canceled check to the lender, so that the money can be withdrawn from the lender's account when the due date arrives.

Car Title Loan v/s Payday Loan : The Factor That Differentiates Them Both

In case of an auto title loan, if a borrower is unable to repay the total amount that is due, then the lender may try to acquire the loan debt by putting the car title on auction. However the borrower gets some grace period to enable him/her to clear the debt. On the other hand, in a payday loan, survey reports speak of borrowers suffering harassment from debt collectors because they could not repay the amount that was due.



Does not the above factor clearly crowns title loans to be a safer option?

But if that is not clear enough, then read on to learn more about why researchers prefer to place title loans on a favorable position.

Statements Imposed and Overruled

Statement That Was Imposed - According to PEW study reports, almost 11 percent of auto title loan borrowers have their car repossessed every year.

How It Was Overruled? – A research survey made in 'Dude, Where’s My Car Title?: The Law, Behavior and Economics of Title Lending Markets' points out a contradicting study that shows this might occur only in the rarest cases.

Statement That Was Imposed - James Speer, who is the executive director of Virginia Poverty Law Center suggests that , “several clients of the law center wound up on the street because they couldn't afford to pay their rent and car title loan, so they paid off the car loan. Others lost their jobs because their vehicles were repossessed and they couldn't get to work”.

How It Was Overruled? – This stands out to be at cross points if we are to follow the statement made by Paige Marta Skiba; an associate professor at Vanderbilt Law School, when she says, “Repossession affects few borrowers, and our evidence indicates that most borrowers will not lose their only way to work because of repossession,... prohibitions on title loans based on the premise that borrowers are frequently losing their vehicles are misguided”

Statement That Was Imposed - Speer had also suggested that title loan companies tend to pay loans to borrowers who are unable to repay.

How It Was Overruled? - While a title loan can be termed as a short term loan lent to people during urgent financial crisis, it is also true that title loan lenders provide detailed information of the payment terms and conditions to a borrower, when someone applies for a loan. Most of the title loan lending companies have this clearly stated on their website. Here is an example of how one of the title loan lenders clearly points it out on their site -

Speaking of transparency, if you are to look into the lending scheme of a payday loan; there are many lenders who are unable to provide exact information when speaking of late payment fines. You won't easily find any detailed information on the website of a payday loan lender with regard to late fines.

Title Loans Are Short Term Emergency Loans Only

Title loans and payday loans are both designed as a solution for those suffering from financial crisis that needs an immediate attention. But each of them apply to different needs and conditions. However, often borrowers tend to use them for purposes they have not been designed for. For example, in a study made by PEW, “...fewer people use title loans than take out payday loans, but they are usually for larger amounts...”.



How Wikipedia explains title loans ?

As clearly stated by every title loan lending company website, title loans are short term loans and hence, should be used only during emergencies when you are unable to avail any other means of financial support. The core to all problems lie in the basic understanding of how each loan type works. Therefore, let me dedicate the next few spaces to help understand how auto title loans and payday loans are meant for different conditions of usage, and also explore the possible reasons why researchers just like Paige Marta Skiba of Vanderbilt Law School, feel Title loans are more secured than payday loans-



#1 - Duration of Loan Period

In case of a payday loan, a borrower normally gets a time duration of 14 days - that is, just two weeks after which you would need to payback the full amount along with the interest and other additional charges. On the other hand, the time duration of a title loan may vary from 30 days to an unlimited time period. The latter case however, may vary from one lender to another. A borrower can pay back on a monthly basis. Sometimes, a title loan lender also grants an additional grace period within which a borrower can repay the loan amount that is due.

#2 - Proof of Economic Stability

A payday loan lender has to write a post dated check in the name of the lender, when applying for a loan. According to the general principle of a payday loan, you receive an advance balance amount from the paycheck. The lender deposits it in your bank account. When the due date arrives, the lender will withdraw the total loan amount along with the interest from your bank account, which is known as CPA or Continuous Payment Authority. This means borrowers need to keep their bank account ready with enough cash for the lender to withdraw the due amount.

Title loans do not require you to show any proof of economic stability. Borrowers can repay their auto title loan either online or through an automated repayment system. However, car title loan lenders cannot withdraw the due amount in advance without your consent. You will be given a separate copy containing a clear disclosure of your transaction terms.

#3 - Loan Recovery During Failure

When a borrower applies for a payday loan, the lender would ask for details like income proof and contact information of relatives. This is done so that, in case the lender cannot withdraw the total loan amount that is due from your bank account, the process of payment collection will continue as long as the lender has not acquired the total loan amount. In such a case, they would try to contact your relatives and even try to access their bank accounts to recover the loan amount.

In a title loan, if a borrower is unable to pay back the due amount, then the lender might repossess his/her car that is then sold off to recover the amount that is in debt. But, normally lenders resort to this step as a last option because of the lengthy process involved with recovery, repossession, auction and the court costs, during which the value of the vehicle will depreciate. So, in certain states the lender provides a grace time period (mostly of 30 days) to the borrower so that he/she could regain the vehicle by paying off the balance.

#4- Money Back Guarantee Scheme

This is a special scheme practiced by some car title loan lenders to ensure that their customers are fully satisfied with their service in the long run. An unsatisfied borrower would receive a refund (along with the interest and other additional fees) 30 days after an account has been opened. This facility is however not available to a borrower in case of a payday loan.

Calculate Your Total Expenditure Before Choosing Your Loan Type

While the above factors provide enough evidence to rule out the statement that title loans are riskier than payday loans, the best thing to do is to measure the amount you actually need before applying for either one of them. This will help you to determine which loan to choose. While a car repair might turn out to be too expensive and for which a car title loan would seem to be more appropriate, a payday loan can be availed to meet out small expenditure costs like electricity bills instead.