Title loans vs. personal loans: Which short-term option makes more sense?
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Trying to decide between a title loan and personal loan?
Selecting whether to take out a title loan versus a personal loan is probably one of the most common dilemmas borrowers face when in need of fast cash. Both title loans and personal loans can provide funds to you quickly. However, the process of each loan works extremely differently.
And that’s not all…
Choosing incorrectly can end up costing you much more than you originally anticipated. Being informed about how each short term vehicle loan works, their differences and what each option entails can help you make better decisions on which loan option makes the most sense for you.
Here’s what you’ll discover:
- What are title loans and personal loans?
- Title loans vs personal loans: The differences
- When each loan type makes sense
- Which short-term loan option should you choose?
What are title loans and personal loans?
Alright, let’s dive into the basics.
A title loan is a secured short term vehicle loan where you can use your car as collateral against the loan. The lending facility will hold your vehicle title until your loan is paid in full. You get to keep your car and drive it around… until you default on your payments.
Understanding how title loans work is key because title loans are meant to be fast. Most lenders will approve your title loan application in less than 24 hours. There are no credit checks. No ridiculous amounts of paperwork to fill out.
Personal loans are different. Personal loans are almost always unsecured which means there’s no collateral involved. Personal loans can be obtained from banks, credit unions, and online lenders. These lenders will typically run a credit check and approve personal loans based on your credit score, income, and financial history. The entire process can take anywhere from a few days up to a week.
While title loans and personal loans can both be used to get money in your pocket quickly, the terms and conditions of each option start to differ.
Title loans vs personal loans: The differences
Okay, now it’s time to get into the good stuff. There are several important differences between each short-term loan solution that every borrower should be aware of before applying.
Interest rates
Title loans have astronomically higher interest rates than personal loans. According to research conducted by the Center for Responsible Lending, title loans have the ability to carry Annual Percentage Rates (APRs) as high as 300%. Compare that to personal loans which have an average APR of 12.26%.
That is a huge difference.
Say you want to borrow $1,000. With a title loan, you could end up paying over $1,200 in fees. With a personal loan, you’d pay a fraction of that amount in interest.
Credit check
This is where title loans shine.
Most title loans do not require a credit check to qualify. The collateral (vehicle) you’re providing instead acts as security. This also allows title loans to be accessible to borrowers with bad credit.
With personal loans? Almost all personal loans run a credit check. Borrowers with poor credit scores are either given high-interest rates or denied outright. The better your credit score, the better chance you have of receiving a lower interest rate.
Possibility of losing your vehicle
This right here is probably the biggest difference between a title loan and a personal loan.
If you fail to repay your title loan, you could lose your vehicle. Since title loans are secured by your vehicle, the lending facility has every right to take your car from you if you don’t pay the loan on time. In a report produced by the CFPB, repossession assignments have exceeded prepandemic levels in every quarter of 2022 and saw a 22.5% increase from Q4 2019.
On the other hand, personal loans don’t have that same risk. If you fail to pay your personal loan on time, your credit score will take a hit and the lender can sue you for debt collection. But they can’t take your car.
Loan amounts & loan terms
Title loans vary by state but typically range anywhere from $100 to $10,000 depending on the value of your vehicle. Title loans are considered short term with many lenders having repayment terms as short as 15 to 30 days.
Personal loans can be taken out in small amounts ($1,000) or large amounts ($50,000). Personal loans also allow borrowers to pick repayment terms anywhere from 1 to 7 years. This gives borrowers more flexibility with their monthly payments.
When does each loan type make sense?
No two borrowers are the same. But here are some scenarios where each loan type would make more sense.
When a title loan makes sense
Consider applying for a title loan if you:
- Need the money within 24 hours
- Have bad or no credit
- Own your car free and clear
- Only need a small amount of money for a short period of time
- Have a plan to repay the loan in a timely manner
If you need cash fast and you have a vehicle to use as collateral… title loans can be a great option. With most title lenders being able to approve loans within 24 hours… they are by far the fastest way to get a short term vehicle loan.
When a personal loan makes sense
A personal loan makes more sense when the borrower:
- Has good to excellent credit
- Needs to borrow a larger amount of money
- Wants lower interest rates and flexible repayment terms
- Does not want to risk their vehicle
Personal loans are great because they offer some of the lowest interest rates for short-term funding. However, you do need to have good credit in order to be approved.
Which short-term loan option should you pick?
It all comes down to your personal circumstances.
If you have high credit and don’t need money right now, a personal loan is going to be much cheaper for you. But if you need the money today and you have a vehicle you can use as collateral… then a title loan might be your only option.
The thing to remember is this…
You need to understand all the fees and terms involved with either option. Read the fine print. Know when your payments are due and how much they will be. Make sure you can afford the monthly payments before getting greedy with the amount you borrow.
Wrapping things up
When comparing title loans versus personal loans, it really comes down to these three things: time, money and risk.
Title loans allow you to get your money in a timely fashion but they are much more expensive than personal loans and you risk losing your vehicle if you fail to pay the loan on time. Personal loans are much cheaper but take longer to get the funds.
Don’t jump into either one without doing your research first. Look at both options, see what your state allows, and then make an informed decision.
After all… that’s what separates someone who made a smart decision on a short-term loan… and someone who made a costly mistake.