We all face an unexpected situation from time to time, and in these times, it’s often money that we need above everything else to solve the emergency. However, it is difficult to meet the emergency expense if you don’t have enough money in the bank, which many people don’t. So many of them ask for credit!
However, the problem is, it takes several weeks for the banks and conventional lenders to offer the money because of their lengthy processing time. In an emergency, you need the money really quick. Thankfully, there are lenders, such as payday lending companies that are able to meet this gap. You could receive the money in less than 48 hours.
Apart from payday loans, there is also the ‘car title loan’ where you can get the money you need relatively quickly. So what are these loans, and which option should you choose in an emergency? Which of these loans will be better for you?
According to a 2015 report brought out by the Pew Charitable Trusts, about 5% of adult Americans take payday loans for a variety of reasons like paying their bills, carrying out urgent repairs of their cars, or to buy medicines. Compared to this, only about 1% takes auto title loans, which comes to slightly more than 2 million people. So clearly payday loans are more popular in the United States, even after all the federal and state restrictions that have been imposed on the lending in recent times.
What Is an Auto Title Loan and How Does It Work
An auto title loan is a secured loan where the equity of your automobile is held as collateral for the money offered to you as the loan. In other words, you will have to hand over the title of your car to the lender to get the loan. You can continue to drive your automobile, but the lending company will place a lien on the registration of your vehicle as security. If you are unable to repay the loan, the lender has the right to take your car.
You can borrow anything between $2,000 to $50,000 in an auto title loan, depending on the state of your residence, and the equity amount in your vehicle. You can put up your car, truck, motorcycle, RVs, and others as collateral. Before issuing the loan, the lending company will first appraise the value of your vehicle to determine a percentage of the value that can be issued to you as the loan. Usually you get between 25% and 50%.
Payday Loans
These loans, on the other hand, are issued against the pay you are scheduled to receive next month. There is no collateral, and so a payday loan is deemed to be unsecured debt. These are small dollar loans where the money is issued usually for 2 weeks or less. You are expected to pay back the amount borrowed, plus the fee and the interest on the day you receive the next paycheck. This is why these loans are referred to as ‘payday loans’.
You can apply online or by visiting the store of a lender. To apply, you have to submit some basic information. The application is processed quickly and the money is deposited into your bank account usually within 2 to 3 business days. Rejections are rare, which means that, the loan is approved almost always.
If you cannot pay back on time for some reason, then you can request the payday lender for an extension of your loan. You will be given a new date, and asked to write a second post-dated check. A new fee is also likely to be charged from you. However, a high percentage of people are always able to pay back their payday loans on time because the amount involved here is less, usually between $300 and $1500.
Comparing Auto Title Loans and Payday Loans
The Loan Duration
• The term of an auto title loan is usually between 12 and 36 months.
• The payday loan term is till your next payday. So it could be anything between 1 day and 29 days. However, it is usually around a couple of weeks.
Amount of Money
• How much you can get from an auto title loan depends on the value of your vehicle at the time when you are applying for the loan. Usually you can get anything between 25% and 50%.
• Payday loans are normally issued between $300 and $1500. Rarely will you get a loan more than this.
The Interest Rate
• In an auto title loan, the APR (Annual Percentage Rate) is 300%, according to the Federal Trade Commission.
• The Consumer Financial Protection Bureau (CFPB) says that the average APR for payday loans is around 400%, which is significantly more than auto title loans. Sometimes, the APR can be even higher. However, for all practical reasons, you will end up paying much less because the loan term is for just about 2 weeks. The amount involved is also less. So it never actually pinches you that much.
For instance, if you have taken a payday loan for $100 and have to repay after 10 days, then the outstanding amount on your payday will be $120. The APR here is a staggering 730%, but you still end up paying back just $20 more. With personal loans and auto title loans, on the other hand, you end up paying back much more, for two reasons – you have to repay over a long time, and second, the amount you borrowed is much more.
Sometimes, title loans can be for as much as $10,000, or more.
Study Finds Payday Loans to Be Better Than Auto Title Loans
According to the findings of a new study that was carried out by the Pew Charitable Trusts, payday lending in the United States is better than auto title loans. The report says, the auto title loan market is “plagued by problems, which includes excessive prices, and un-affordable payments.
Director of the small-dollar loans project of Pew Nick Bourke had this to say, “We found that auto title loans require balloon payments that borrowers can’t afford and most customers end up having to re-borrow the loans repeatedly”.
In fact, Pew found that the average customer of auto title loans often end up paying more towards the fees than the amount borrowed. Pew Charitable Trusts also comments in their report that the amount due for consumers is often more than 50% of their monthly income, and as a result, they are left with no other option but to renew the loan, often, month after month. Half the people Pew Charitable Trusts surveyed said that they took the loan so they could pay their regular bills.
Presently, auto title loans can be offered in 25 states. According to the estimates of Pew, more than two million people in the United States take these loans every year presently, and this generates $3 billion in revenue approximately.
The Report Published By Newsweek
The finding of Pew Charitable Trusts is not the only report. For instance, Newsweek recently published a report (on July 29th), according to which, payday lending industry in the US is extremely regulated, which is in contrast to what the critics are saying. The report arrived at this conclusion after examining state-level and federal regulations that are already in place, and also the jurisdictions at the municipal levels.
Critics have been slamming payday loans for quite some time now, and have been asking legislatives to impose more restrictions. However, according to the findings, as published by Newsweek, a highly respectable journal, there are adequate restrictions in place already in the United States, at the federal, state, and municipal levels. So nothing more is needed at this time.
The payday lending industry is offering a valuable service to a large section of the society, people who often, cannot get a loan from anywhere else when they are facing an emergency. In fact, many studies have revealed that these people are returning to the payday lenders again and again when they need a loan. If the payday lending companies are driving the people into a debt trap, then would the same individuals be able to repay on time and come back to the lending companies? Probably not!
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