What to know about payday loans and car title loans

What to know about payday loans and car title loans

If you need quick cash to deal with an emergency or pay your bills or rent, a payday loan or car title loan may be tempting. But both loan options are expensive and can leave you in a mountain of debt. Please find out how they work and learn other ways to get money or credit quickly.

  • What to know about payday loans
  • What to know about car title loans
  • What information should I look for if applying for a payday or car title loan?
  • Possible Alternatives to Payday or Car Title Loans
  • What if I am a member of the Armed Forces?
  • Report fraud or deception
What to know about payday loans and car title loans

What to know about payday loans

Payday loans are small, short-term loans. These are typical $500 or fewer loans and must be repaid within two to four weeks. These loans, also called cash advances, are legal in most states.

To get a payday loan, you give the lender a personal check for the amount you want to borrow, plus the lender’s fees. Or, you authorize the lender to electronically debit your bank account for the loan amount plus fees. If you do not repay the loan on time, the lender can cash the check or electronically deduct the payment from your account.

Payday loans are expensive. Lenders typically charge between $10 and $30 for every $100 loan. This is to say that, on a typical payday loan, a fee of $15 per $100 equals an annual percentage rate (APR) of 391%. The APR tells you how much it costs you to borrow money for a year. By comparison, the average APR for credit cards is 15%.

Let’s see how a typical payday loan works:

  • You want a loan of $500. The lender offers you a loan for two weeks. The fee is $15 for every $100 you borrow. So your charge will be $75.
  • You either give the lender a check for $575 or authorize the lender to debit your bank account for that amount electronically. The lender gives you $500 in cash.
  • Two weeks later, you pay the lender $575. Depending on how you have agreed to repay the loan, at that point, the lender may debit your bank account, cash your check, or accept your payment in cash or some other means.
  • Conclusion: You paid $75 to take out a loan of $500 for two weeks.

Costs increase with renovations. If you can’t repay the loan by the due date, many lenders will extend the due date for another two to four weeks, but you must pay another fee. That is what is called a “rollover” or loan renewal. Each time you defer payment on the loan, the lender will charge you a new fee, and you still owe the full original balance. With these renewals, the cost of the loan increases rapidly.

Let’s see how a current renewal or rollover works:

  • Using the same example as before, you don’t pay on the original due date; instead, you renew the $500 loan for another two weeks. This renewal costs you another $75.
  • That $75 is added to the $575 you already owed, so you now owe $650.
  • With the rollover or renewal, the cost of taking out a loan of $500 for four weeks is $150.

If you renew the loan multiple times, you could pay hundreds of dollars in fees and still owe the original loan amount.

What to know about car title loans

Car title loans, often called title loans, are also short-term loans. They usually have a term of 15 or 30 days. The guarantee or collateral of these loans is your car, truck, motorcycle, or some other vehicle. Car title loans are typically made for an amount ranging from 25% to 50% of the vehicle’s value.

To get a title loan, you must give the title to your vehicle to the lender. You generally have to own your vehicle without any liens or liens, but some lenders will accept your title if you’ve already paid off most of your vehicle loan. The lender will want to see the vehicle, personal photo identification, and proof of insurance. Many lenders also require the delivery of a duplicate set of vehicle keys.

If you get a title loan, you will get your title back to your vehicle once you repay the amount you borrowed, plus the lender’s finance fee and any other applicable fees.

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Title loans are expensive. The average finance charge for title loans is typically 25%, which equates to an APR of approximately 300%. Often, car title lenders add other fees to the loan amount, such as processing fees, documentation fees, and loan origination fees. You may also need to purchase add-ons like a car service plan. If you have to pay other fees and buy extras, the cost of your loan will be even higher.

Let’s see how a regular title loan works:

  • You want to take out a loan of $1,000 for 30 days.
  • The finance charge is 25%. You must pay $250 to take out a $1,000 loan.
  • You give the title to your car to the lender, and the lender gives you $1,000 in cash.
  • At 30 days, when the lender’s repayment date arrives, you must pay the lender $1,250 plus any other fees the lender charges.

Costs increase with renovations. As with payday loans, if you can’t pay off a title loan by the due date, the lender may allow you to renew it by making a new loan. But when you renew the loan, more interest and fees will be added to the amount you owe.

Let’s see how a current renewal or rollover works:

  • Using the same example as before, on the original due date, you do not pay, and instead of paying, you renew the $1,000 30-day loan for another 30 days. Renewal or rollover will add another $250 in finance charges, plus any other applicable charges, to the amount you owe.
  • That $250 is added to the $1,250 you already owe, so now you owe $1,500, plus any other fees the lender might charge for renewal or rollover.
  • With the rollover or renewal, the cost of taking out a loan of $1,000 for 60 days is $500.

You may lose your vehicle. If you cannot pay the money you owe, the lender can repossess your vehicle, even if you have been making partial payments. When you get the loan, some lenders will insist on installing a Global Positioning System (GPS) or some other ignition interrupt device to locate the vehicle and disable the ignition system remotely, thus making the process easier for them. of recovery.

Once the lender recovers your vehicle, it can be sold, and you will be left without your means of transportation. In some states, lenders can keep the full sale amount, even if they receive more than you owe.

What information should I look for if applying for a payday or car title loan?

Federal law sets the same requirements for payday and car title loans as for other types of credit: lenders must tell you the cost of the loan in writing before you sign the loan agreement. They should tell you the finance charge, a dollar amount, and the APR, a percentage. The APR depends on the amount of money you borrow, the monthly finance charge, the fees you must pay (processing fees, documentation, and other fees), and the loan length. Use the APR rate to compare the cost of borrowing money from different lenders. That is the clearest way to see how expensive a loan is.

But read the loan agreement carefully to see if any other costs or fees apply. This may include late fees or bounced checks. There may also be fees for renewing the loan.

Also, find out about the laws that apply to payday and title loans in your state by contacting your attorney general or state regulator. Several states protect people from high-cost payday loans by setting caps on small loan rates or other measures. In addition, in several states, providers must obtain a license to operate.

Possible Alternatives to Payday or Car Title Loans

Listed below are some lower-cost, lower-risk alternative options to payday loans and title loans:

  • Ask your employer to give you a salary advance. Your employer may be willing to give you money that has already been earned but has not been paid. For example, if you worked seven days, but your next paycheck is due in five days, your employer may be able to pay you for those seven days of work. This is not a loan. It will be deducted from your next paycheck.
  • Ask your creditors for more time to pay your bills. They may be willing to try to find a solution to your problem. If you are offered an extension to pay your bills, find out what fee you will be charged for that service, a late payment fee, an additional finance charge, or a higher interest rate.
  • Try to get a loan at a credit union. Credit unions generally offer lower interest rates than banks or other lenders, and some federal credit unions offer “Payday Alternative Loans,” or “PALs,” for low amounts. These alternative loans, called PALs, are much less expensive than payday or title loans. Some state-registered credit unions also offer loans similar to PALs.
  • Visit a local bank. Local banks offer smaller loans with easier repayment terms than large regional and national banks. Talk to a small bank in your area to determine if you qualify for a loan.
  • Use your tax refund. If you’ll get a tax refund soon, apply immediately. The IRS says it generally issues refunds within 21 days if you file electronically. Ask the IRS if they can direct deposit your refund into your bank account.
  • Seek help managing your debt. A credit counselor can help you manage your debt. In every state, non-profit groups offer credit counseling to people at no or low cost. You can also ask your employer, a credit union, or a housing authority if they can recommend free or low-cost credit counseling programs.
  • Ask family and friends for help. It’s not easy to borrow money from family or friends, but avoiding a payday or title loan or renewal of these loans may be worth it.
  • Local charities and churches. Charities, churches, and other religious centers often offer free financial and other assistance to members of their communities who are having a hard time. They do that, and asking these groups for help is okay.

What if I am a member of the Armed Forces?

The Military Lending Act protects you and your dependents if you are a military member. The law sets a maximum APR of 36% for various types of credit, including payday loans, car title loans, personal loans, and credit cards. The law also states that lenders must give you information about your rights and the cost of the loan.

The Armed Forces also offer financial aid and assistance with managing money. If you are experiencing financial difficulties, talk to a personal financial manager (PFM) about your options. Do you need more time to pay your bills or a salary advance? Want to talk to a certified credit counselor about managing your money? Do you want help from a military assistance organization? Call the Department of Defense’s Military OneSource hotline at 1-800-342-9647 to discuss alternatives. For more information, visit MilitaryConsumer.gov.

Report fraud or deception

If you may have been dealing with a rogue payday or car title lender, contact your state attorney general or state consumer protection agency. Also, report it to the Federal Trade Commission (FTC) at ReportFraude.ftc.gov. The FTC doesn’t resolve individual complaints, but your report helps authorities spot repeat patterns of wrongdoing and may prompt an investigation.

Can I get a same-day payday loan?


A same-day loan may sound appealing if you are strapped for money and have a financial emergency. But beware of excessive fees that add to high-interest rates, and remember that not all payday lenders who advertise same-day loans guarantee same-day cash.

Editorial note: Credit Karma receives compensation from third-party advertisers, but this does not affect our editors’ opinions. Our marketing partners do not review or endorse our editorial content. This content is presented as accurately as possible at the time of publication.

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If you face a financial emergency, a same-day loan can help you meet your short-term needs until your next paycheck.

But you’ll most likely have to pay for the convenience of short-term loans: Payday loans are notorious for their excessive fees, which translate to triple-digit interest rates. With payday loans, it’s not uncommon to pay fees that translate into APRs, or Annual Percentage Rates, of nearly 400%. Payday lenders tend to lend small amounts, often $500 or less, and payment is usually by the next payday, although terms vary by state.

Payday lenders often promote same-day financing as a marketing pitch, but you may get your money the same day you’re approved. The timing of receiving the funds varies by lender.

Should I consider a same-day payday loan?

Payday loans should only be used as a last resort after you have exhausted other options. Considering a same-day payday loan, weighing the pros and cons is important. Here is a detailed analysis for you to explore the available options.

Advantages of same-day payday loans

  • Fast cash when you need it: If you need to get your vehicle fixed as soon as possible, a same-day loan can get you the money you need fast, sometimes the same day or the next business day, depending on the lender.
  • No Collateral Required: Payday loans are unsecured loans. Unlike a pawn loan or title loan, you don’t have to use your car or personal property as collateral to back the loan.
  • Poor credit may be fine: People with not-so-good credit scores can get approved for same-day payday loans. Some payday lenders need to perform credit checks.
  • Lender Options: Depending on your state’s laws, you can apply for a payday loan online or in-store.

Disadvantages of same-day payday loans

  • High APRs and Fees: Beware of payday lenders who advertise seemingly low rates because they can rack up sky-high interest rates. The Consumer Financial Protection Bureau says charging a $15 fee for every $100 borrowed is common. That pays an APR of nearly 400% for a two-week loan. By comparison, in May 2019, the average interest rate on a 24-month personal loan was 10.63%, and that on credit cards was 15.13%, according to the Federal Reserve. A personal loan or credit card can be a less expensive way to fill a financial gap.
  • Potential debt cycle: Payday loans can put you in a debt hole that’s hard to escape. The CFPB found that four out of five payday loans are reborrowed within a month, which means you could face more fees. In the long run, you may even pay more than you borrowed in fees.
  • Not a long-term solution: Create an emergency savings fund to draw on when unexpected expenses arise. If borrowing small amounts of money here and there becomes routine, you could find yourself over-reliant on debt instead of solving underlying problems.

What are my alternatives to a same-day payday loan?

Payday loans are one of many options when you need a quick loan. Comparing payday loans with other alternatives can help you find the right option for your circumstances.

Use an existing credit card.

If you already have a credit card, consider turning it over when you need money. Interest rates on your credit cards can be much more competitive than payday loans.

Apply for an alternative loan to a payday loan.

Some federal credit unions offer alternative payday loans, which limit application fees (capped at $20). Loan amounts range from $200 to $1,000 and have terms of one to six months.

To apply, you must be a credit union member for at least one month.

Apply for a small amount of personal loan.

An unsecured personal loan is paid in monthly installments over a set period. Loan terms vary by lender but typically range from 24 to 84 months, giving you time to spread out the payments.

Consider a cash advance.

A cash advance allows you to borrow money against the available balance on your credit card. But cash advances often come with higher processing fees and interest rates than regular credit cards.

If you want to avoid using a credit card, several apps are putting a new spin on cash advances.

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What to know about payday loans and car title loans

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