For most people, there are really only two legitimate choices for taking out a loan. Yes, there are banks, and yes there are credit card companies that can extend you a line, but it takes money to borrow money, and you have to already have credit if you want to get credit.
So for most of the rest of us, there are just the two choices if we need to get a short-term loan:
If you have never needed to borrow money before, you may be asking what the difference is between the two. It all comes down to collateral.
A Question of Collateral
There are several definitions of the word, but the type of collateral that we’re talking about is something that is used as security for money borrowed, which is forfeited if the money isn’t repaid. Collateral can be a house or land, or it can be a boat or a car.
Collateral is a sort of insurance for the lender. That way if they lose their money they have something to show for it. If a borrower defaults on a mortgage, the bank can legally take their house.
When a borrower has a house or land to use as collateral, they have a great many financial options for borrowing money. Those who do not own their own home have a much narrower field of choices.
Title Loans use the title/ legal ownership of a vehicle as collateral for a loan. In most cases, these lenders do not take your vehicle – the loan is given, and the borrower gets to keep their vehicle for the duration of the loan. Once repaid, the title reverts back to the owner, and business is settled. However, if the loan is defaulted, the borrower does legally own your vehicle now.
With a Payday Loan, the collateral is based on your pay stubs. There is no physical collateral to use – no house or car – so the lender looks at past earnings, confirms your employment, and uses your future paychecks as collateral. The borrower is putting up future “paydays” to get money now.
Risks and Benefits
Just as a house will secure a larger loan than a title loan, a title loan will usually secure a larger loan than a payday loan. The more you have to venture, the more you can borrow. But while the loan will be larger than a payday loan, defaulting on a title loan will cost you the use of your vehicle.
The size of a payday loan is commensurate with the amount of money you make: in general, payday loans range from $100 to $500. And since they are secured by your next paycheck, the loan really should be repaid in full with that paycheck. This very short repayment window is one aspect that should be planned for before taking out this kind of loan.
On the other hand, with title loans you risk your car, with a payday loan you only risk your next paycheck.