If you need quick cash to deal with an emergency, to pay your bills or rent, a payday loan or car title loan might be a tempting option. But both of these loan options are very expensive and can leave you trapped in a mountain of debt. Find out how they work and learn about other possible ways to get money or credit fast.
What to know about payday loans
Payday loans are small, short-term loans. These are typically loans of $500 or less, and usually have to 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 don’t repay the loan on time, the lender may cash the check or electronically debit the payment from your account.
Payday loans are expensive. Lenders typically charge between $10 and $30 for every $100 loaned. This means that, on a typical payday loan, a fee of $15 per $100 equates to 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%.
Costs increase with renovations. If you can’t repay the loan by the due date, several lenders will extend the due date for another two or 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.
If you renew the loan multiple times, you could end up paying 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 for an amount ranging from 25% to 50% percent of the vehicle’s value.
To obtain a title loan, you must surrender the title to your vehicle to the lender. Generally, you have to own your vehicle without any lien or lien, 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, a personal photo ID, and proof of insurance. Many lenders also require a duplicate set of vehicle keys.
If you take out a title loan, you won’t get title to your vehicle until you repay the amount you borrowed plus the lender’s finance charge and any other applicable fees.
Title loans are expensive. The average finance charge for title loans is typically 25%, which equates to an APR of approximately 300%. Car title lenders often 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, such as a car service plan. If you have to pay other fees and purchase additional items, the cost of your loan will be even higher.
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 with a new loan. But when you renew the loan, more interest and fees will be added to the amount you owe.
You may lose your vehicle. If you can’t pay the money you owe, the lender can repossess or repossess your vehicle, even if you were making partial payments. At the time of obtaining the loan, some lenders will insist on installing a Global Positioning System (GPS) or some other ignition interlock device to locate the vehicle and disable the ignition system remotely, thus making the process easier for them. recovery.
Once the lender repossesses your vehicle, it can be sold and you will be left without your means of transportation. In some states, lenders can keep the full amount of the sale, even if they receive more than you owe.
What information should I look for if applying for a car title or payday loan?
Federal law has the same requirements for car title and payday loans as for other types of credit: lenders must tell you the cost of the loan in writing before you sign the loan agreement. You should be told the finance charge, which is a dollar amount, and the APR, which is a percentage. The APR depends on the amount of money you borrow, the monthly finance charge, the fees you will have to pay (for example, processing, documentation, and other fees), and the length of the loan. Use the APR to compare the cost of borrowing money from different lenders. That is the clearest way to see how expensive a loan is.
But be sure to read the loan agreement carefully to see if any other costs or fees will apply. This may include late payment fees or returned checks. There may also be fees to renew the loan.
Also, find out about the laws that apply to payday loans and title loans in your state by contacting your state attorney general or state regulatory agency. Several states protect people from high-cost payday loans by capping rates on small loans or other measures. Also, in several states providers must obtain a license to operate.
Possible Alternatives to Payday Loans or Car Title Loans
Here are some lower-cost, lower-risk alternative options to payday loans and title loans:
- Ask your employer for a salary advance. Your employer may be willing to give you money that has already been earned but not yet paid to you. For example, if you worked seven days, but would only receive your next paycheck 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. Maybe they are willing to try to find a solution to your problem. If you are offered an extension to pay your bills, find out what type of 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 from a credit union. Credit unions generally offer lower interest rates than banks or other lenders, and some federal credit unions offer “Alternative Payday 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 PAL-like loans.
- Visit a local bank. Local banks offer smaller loans with easier repayment terms than larger regional and national banks. Talk to a small bank in your area to find out if you may qualify for a loan.
- Use your tax refund. If you think you’ll get a tax refund soon, apply as soon as possible. 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.
- Find help managing your debt. A credit counselor may be able to help you manage your debts. In every state, there are nonprofit groups that offer free or low-cost credit counseling to people. 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 for help from family and friends. It’s not easy to borrow money from family or friends, but it may be worth it to avoid a payday or title loan or renewal of these loans.
- Charitable organizations and local churches. Charities, churches, and other religious centers often offer free financial and other assistance to members of their communities who are experiencing a difficult time. That’s what they do, and it’s okay to ask these groups for help.
What if I am a member of the Armed Forces?
If you are a member of the military, the Military Lending Act protects you and your dependents. The law establishes 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.