Times are tough and money is tight, so what do you do? For some, this might lead to applying for a payday or car title loan. However, most are unaware of the high interest rates and fees associated with these types of loans.
First, what is a payday or car title loan? A payday loan is a relatively small amount of money lent at a high interest rate with the agreement that the loan amount will be repaid when the borrower receives their next paycheck.[I]
People who generally tend to use these types of loans are those who have a checking account and steady income. Since these types of lenders don’t require a credit check, most people who seek these types of loans also may have poor or no credit.
Similar to a payday loan, a car title loan is also a loan for a relatively small amount for a short period of time .[ii] For these loans, lenders ask for your vehicles title in order for you to be able to get the loan. Along with giving your title to the lender, you also have to pay a fee to borrow the money, and usually have to repay the loan amount in 30 days.
If you’re someone in need of quick money, and feel that you have no other financial options, you may resort to one of these loans. However, consider these facts before making a final decision:
- Payday & Car title loans are much more expensive than other methods of borrowing money
- In most cases, the annual percentage rate (APR) on a payday loan averages around 400% compared to credit card APRs at 12%, and standard loans around 7%
- Car title loans have an APR of 300% (also way above the rate for credit cards and standard loans)
- With a car title loan, if you cannot afford to repay the loan, the lender can take your car
- With a payday loan, the lenders have access to clear your bank accounts to get payment
So, for those of you who have been thinking about pursuing one of these loans, make sure you research all other options before making your final decision.