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Payday and Car Title Loans: What Most Borrowers Don’t Know

Guest Blogger August 28, 2025

By Tara Carter

When times are tough and money is tight, what do you do? 

For some people, being in a state of financial stress can lead them to consider high-risk loans, such as payday and car title loans. However, most borrowers are unaware of just how dangerous these loans are for your credit, your finances and even your emotional well-being.

Not only do these types of loans have high interest rates and fees, but car title loans put you at risk of losing your car. In fact, payday and car title loans are so risky that they’re banned in 19 states.

Here’s what you need to know before considering one of these loans.

What is a payday loan? 

A payday loan, also called a cash advance loan, is a small loan that you repay when you receive your next paycheck. You can think of it as an advance on your paycheck, but with high interest charges and fees.

These loans can be attractive if you have no credit or poor credit, since they don’t require credit checks in order for you to qualify. But they come with major drawbacks, including:

  • Sky-high interest rates: Rates average around 400%. By comparison, credit card APRs are closer to 12% and personal loans are around 7%.
  • Debt cycles: Many lenders let you pay off your debt with a new loan if you can’t pay it back on time. This is also known as a “rollover.” As a result of rollovers, you can end up in a never-ending cycle of debt. 
  • Bank issues: The lender can attempt to withdraw the payment directly from your bank account. This can lead to banking problems like overdrafts, bounced check fees or missing payments on essential bills.

What is a car title loan? 

A car title loan is a loan where you have to hand over your vehicle’s title, and sometimes your car keys, in order to qualify. If you don’t pay the loan back on time, usually within 15 or 30 days, the lender can keep your car.

In addition to offering your property as collateral, you usually have to pay fees and interest charges that amount to roughly 300% APR. On top of that, the lender might charge extra fees for add-on items, like roadside services.

As with payday loans, you can roll your debt over into a new loan if you don’t have the money to pay on time. However, doing this just leads to more and more unmanageable debt. 

Safer alternatives to payday loans and title loans

For anyone thinking about applying for these types of loans, we recommend being cautious. Payday loans and car title loans should only be considered as your lost option in a financial emergency, since they’re more expensive and risky than using other loan types, and even using credit cards.

Before you apply for a title loan or payday loan, consider all of your other options. They might include:

  • Applying for a Payday Alternative Loan at a credit union.
  • Applying for an emergency loan (typically available for people with good credit).
  • Borrowing money from a loved one.
  • Selling valuables to come up with the funds.

Need help exploring your options? Our NFCC-certified credit counselors can help you out by reviewing your budget and credit, and offering personalized advice on how to deal with a financial emergency. They can also help you address the underlying issues that may have caused your financial stress in the first place.

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