Title and payday loans are both types of short-term loans that individuals get quickly and without extensive credit checks, but there are key differences between the two. A title loan is a loan in which the borrower’s vehicle is used as collateral.

The vehicle’s value determines the loan amount, and the borrower receives a portion of that value as a loan. The borrower continues to use the vehicle during the loan term, but if the loan is not repaid, they risk losing the vehicle. A payday loan is an unsecured loan based on the borrower’s income and ability to repay the loan, which is repaid with the next paycheck. 

Borrowers must carefully weigh the terms and risks of both types of loans before deciding which option suits their needs. Title loans are more expensive than payday loans but offer larger loan amounts and lower interest rates since they are secured by collateral. Title loans are riskier because the borrower risks losing their vehicle.

Overview Of Title Loans

Title loans are a type of secured loan where borrowers use their vehicle as collateral, allowing them to receive a percentage of their appraised value as a loan. They are offered by alternative lenders to people with poor credit or limited options for quick cash. The borrower must own the vehicle outright and provide a clear title, proof of income, and a valid ID to qualify.

Title loans include high-interest rates, fees, and the danger of extra costs if the loan is not returned on time or the car is damaged or stolen, but the borrower still drives the vehicle. Defaulting on the loan result in the loss of the vehicle, which the lender sells to recover the outstanding balance. Borrowers must check the potential consequences before applying for a title loan.

Title loans rates chart

Overview Of Payday Loans

Payday loans are short-term, unsecured loan options obtained without extensive credit checks. Borrowers provide proof of income and a valid ID to qualify for the loan. Consumers repay interest and fees on the borrower’s next payday. Borrowers must check the terms and explore alternative options.

Title Loans Eligibility Requirements

The eligibility requirements for a title loan generally include owning a vehicle outright with a clear title, providing proof of income and valid identification, showing proof of vehicle registration, undergoing a physical vehicle inspection, and being at least 18 years old. 

  • Ownership of a vehicle – The borrower must own a vehicle outright and have a clear title, meaning there are no liens or outstanding loans.
  • Proof of income – The lender requires proof of income to know that the borrower has the ability to repay the loan.
  • Valid identification – The borrower must provide a valid government-issued ID, like a driver’s license.
  • Vehicle registration – The borrower must provide proof of vehicle registration to show that the vehicle is registered in their name.
  • Vehicle inspection – The lender requires a physical inspection of the vehicle to determine its value and condition.
  • Minimum age – The borrower must be at least 18 to be eligible for a title loan.

Payday Loans Eligibility Requirements

The eligibility requirements for payday loans include providing proof of income, having an active bank account in the borrower’s name, providing a valid government-issued ID, and being at least 18 years old.

  • Proof of income – The borrower must provide proof of income, like pay stubs or bank statements, to demonstrate their ability to repay the loan.
  • Active bank account – The borrower must have an active bank account, as the loan proceeds are deposited directly into its account.
  • Valid identification -The borrower must provide a valid government-issued ID, like a driver’s license.
  • Age – The borrower must be at least 18 to be eligible for a payday loan.

Cost Comparison of Payday Loans and Title Loans

Lenders charge borrowers between $10 and $30 for every $100 borrowed on payday loans. The annual percentage rate (APR) amounts to 391%, with a fee of $15 per $100 on a two-week payday loan, substantially higher than the average APR of 15% for credit cards. 

Title loans have an average monthly finance fee of 25%, translating to an APR of around 300%. Title lenders charge processing, document, and origination costs.

Here is a sample illustration comparing Payday Loans and Title Loans, according to Federal Trade Commission Consumer Advice.

Loan TypeLoan AmountFeesAPROther Charges
Payday Loan$300$45391%N/A
Title Loan$2,500$625300%$100 processing fee, $50 document fee

What Are The Advantages of Title Loans?

Title loans offer quick access to cash without requiring a credit check and provide larger loan amounts than other short-term loans. Advantages include quick access to cash, no credit check, and large loan amounts.

  • Quick access to cash – Title loans are processed quickly, and funds are available within a day.
  • No credit check – The borrower’s car secures the loan; therefore, credit history doesn’t matter.
  • Large loan amounts – Borrowers get larger loan amounts with a title loan than with a payday loan or other types of short-term loans.

What Are The Advantages of Payday Loans?

The advantage of payday loans is that they provide quick access to cash for emergencies. The eligibility requirements are minimal, and the application process is convenient. 

Listed below are payday loan advantages.

  • Quick access to cash – Payday loans provide fast cash for emergencies or to bridge a short-term financial gap.
  • Few eligibility requirements – Payday loans are easy to get, with few eligibility requirements and no need for collateral.
  • Convenient application process – The application process is straightforward, and individuals have to online or in person.

How To Apply For A Loan?

Applying for a loan involves finding a licensed and reputable lender, gathering income and employment information, filling out an application form, reviewing the loan terms, including the interest rate and repayment terms, submitting the application, and receiving the funds if approved. Lender and state regulations differ. 

  1. Look for lenders licensed and reputable. Check with the state’s regulatory agency to see if the lender is licensed to operate in their state.
  2. Gather required documents: Depending on the lender and type of loan. Borrowers must provide documents like income verification, tax returns, bank statements, and identification.
  3. n: Once you have chosen a lender, complete the application process by providing all required documentation and filling out the application form accurately.
  4. The next step is to fill out an application form provided by the lender after one has acquired the required paperwork. It forms and asks for information about income, expenses, and other debts.
  5. Wait for approval. The lender reviews the application and credit score to determine if the application is approved for the loan. The process takes several days or longer, depending on the lender and the type of loan.
  6. Receive the funds once the application is approved. Lenders deposit the funds into one’s bank account within one or two business days.

Bottom Line

Both title and payday loans offer quick access to cash without requiring extensive credit checks. There are several key differences between the two. Title loans are secured by collateral (the borrower’s vehicle) and offer larger loan amounts and lower interest rates but risk losing the vehicle if the loan is not repaid.

Payday loans are unsecured and based on the borrower’s income but have higher interest rates and fees, resulting in other charges and damage to the borrower’s credit score if not repaid on time. Borrowers must weigh the terms and risks of both types of loans before deciding which option suits their needs.

Frequently Asked Questions

How do title loans and payday loans differ in terms of collateral?

Title loans use a borrower’s car as collateral while payday loans are unsecured, only requiring access to the borrower’s bank account to collect repayment. Payday lenders have no claim to a borrower’s property if unpaid.

What are the typical interest rates associated with title loans compared to payday loans?

Title loans typically have lower interest rates than payday loans, averaging around 25% APR compared to payday loan rates which are often 400% APR or higher. However, title loan rates can still be considered predatory.

Are there any credit score requirements for obtaining a title loan versus a payday loan?

Title loans typically have no credit score requirements as the lender can repossess the car if unpaid. Payday loans also have no credit check but require proof of income and a bank account to access funds.

What are the potential consequences of defaulting on a title loan versus a payday loan?

Defaulting on a title loan risks losing your vehicle to repossession. With payday loans, lenders cannot seize assets but can pursue aggressive debt collection practices and lawsuits to recoup funds.

How do the application and approval processes for title loans and payday loans vary?

Title loans require submitting your car’s title as collateral during a quick in-person application. Payday loans can be applied for online or in-store with proof of income and bank account access.

Jason Rathman

Jason Rathman


Jason writes about all financial topics such as loans, debt solutions, and bankruptcy. He is an expert when it comes to subjects like APR, loan fine print, debt collection laws within the United States. With his in-depth knowledge of all things financial, he is a great asset to Greendayonline.