Payday and title loans are some of the most convenient and accessible financing instruments out there. Marketed as fast, easy with no credit check requirements, it’s no wonder why many people fall to the lure of payday and title loans to bridge their financial gaps. In fact, according to the data gathered by The Pew Charitable Trusts, 12 million or so Americans had approached payday loans lenders in 2010.
For the borrowers, payday and title loans seem to provide the financial solution they’re looking for. For the lenders, it means more business for them. However, while payday and title loans do offer a temporary respite millions of Americans experiencing financial shortages, they’re also not healthy to the borrowers’ financial well-being.
This article will explore what payday and title loans are and the reasons why you should avoid them the best that you can.
What Are Payday Loans?
Payday loans are short-term, small-scale loans borrowers take to solve an urgent financial issue. Instead of the typical interest rate in most loans and credit lines, payday loans impose a flat fee on top of the principal loan amount. Additionally, the loan is due to be paid on your next payday (typically on two-week cycle basis). You need to give the lender access to your bank account, so they can deposit the loan and pull out the payment. Or, you may be required to provide a post-dated check to the lender due on the agreed payment date.
Why Are Payday Loans Attractive?
You might also wonder why payday loans attract millions of Americans each year. Well, for the most part, payday loans have some appealing selling points – they’re very easy to qualify for, you can get the loan amount in a few hours or within the business day, and most lenders don’t require a credit check. Payday loans have more lenient qualifications than mainstream loans, so they’re also most likely to attract borrowers who are having a hard time qualifying for mainstream financing options.
Why Payday Loans Are Horrible
1. Ridiculous Fee Structure
Consider the interest of credit cards which may range from 20 to 36 percent. Now consider payday loans, which for instance, start at $15 for every borrowed $100. Doing the math, you’ll find that payday loans cost around 400% each year, or ten times more than your credit card interest. It is true that you will pay more for payday loans convenience and accessibility, but the rates are too exorbitant. It is also for this reason why many borrowers find it hard to break away from their payment cycles.
2. They’re Built to Trap You
Say you borrowed payday loans at the principal amount of $500 which you will later pay $560 after factoring in the borrowing costs. If you still experience cash shortage until the day the loan is due, you may find it challenging to pay the entire loan. What most people do when they can’t afford wipe the loan off on the agreed date is pay an additional interest and extend the due date for another cycle.
Rolling over the loan can seem like the perfect option when you don’t have the repayment ready yet, but doing so for a couple more times will lead to a payment blown out of proportion. Instead of paying the loan in two weeks, many people struggle and stay in debt for several months to a few years.
3. Can Lead to Impulse Spending
We are exposed to spending temptations on a daily basis. It’s good that payday loans are so easy and accessible that you can have an application approved during your lunch break, but it’s also bad that their sheer convenience make you think that you have the money to spend.
Payday loans are processed and approved in such a short span of time so you also don’t get as much time to really think things through. Unfortunately, once you apply, got approved and had the money, you cannot retract should you change your mind.
What Are Title Loans?
Now we move on to title loans. Title loans are loans that use titles as collateral, commonly a vehicle title. Basically, you will drive your car to the title loans lender, shows him the title and then a car appraisal takes place. Most lenders prefer that you own the car outright and you don’t have any outstanding car loan debt. When approved, you still get to drive your car, have the cash in hand but the title and other documents are left to the lender.
Most title loans are payable within 30 days. You need to go back to the lender on the due date, provide the payment then claim the title back. Otherwise, the interest of the loan may be rolled over (as in the case of payday loans), and the cost of the loan becomes even more expensive. The lender may also seize the vehicle when you default on the loan.
Why Are Title Loans Attractive?
According to a report by the Pew Charitable Trusts, over 2 million adult Americans are taking title loans. The industry is also booming with a recorded 8,000 plus title loans stores spread out in over 25 states in the country.
For the cash-strapped borrower, title loans provide a fast and quick respite. Title loans can offer higher loan amounts than most payday loans, depending on your car’s value. Also, title loans don’t require traditional credit checks which make them ideal for people with poor or no credit. Lastly, you still get to keep your car and obtain the loan in several minutes.
Why Title Loans are Horrible
1. YOU COULD LOSE YOUR CAR
Most title loans are payable in the next thirty days. However, not all borrowers can provide the lump payment plus borrowing charges by this time, so they have the option to roll the loan over. Rolling the loan over means your deadline is extended to another agreed date, and the borrowing rates are added to the payable amount. This cycle goes on and on until you’re able to pay the loan back.
However, the lender has the right to repossess your vehicle if you become negligent or totally defaulted on the loan. You can lose your car, which in turn, could affect your daily routine, from going to work, running errands to going on trips with your family. Owning a vehicle in this modern age is not just a luxury, but a necessity, and you could lose yours to a title loans lender.
2. Incredibly High Interest Rates
Just like payday loans, title loans have very hefty charges that make traditional financial options pale in comparison. According to The Pew Charitable Trusts, title loan amounts are offered at an average of $1,000 with the hefty 300% APR. Also, lenders may impose additional fees relative to obtaining the loan. The average $1,000 could end up around $1,250 when all fees are considered.
Unfortunately, many of the title loans borrowers are those who already struggle with their finances and those who have poor financial management. The Pew study further reveals that half of the title loans borrowers face difficulty in meeting their financial needs half of the time. Additionally, the study also reports that 3 out of 10 borrowers are struggling to meet ends meet. This places borrowers in an even more complicated financial mess and most likely in deeper debt.
3. You Could Get Into Even More Debt
Title loans may have lower interest rates than payday loans, but they are not in any way near the market standard. The interest a borrower has to pay on title loans is so high that they often end up renewing the loan instead of getting over it the first time around.
According to CFPB, 12% of the borrowers ended up renewing their loans for at least seven times, leading them to incur a new set of hefty fees and rates each time. The Pew Charitable Trusts also says that the main reason why borrowers end up renewing their title loans instead of paying up on the first due date is the larger payment. Title loans require balloon payments which are due in 30 days, and sadly, many of the borrowers only feel the brunt of the loan come the due date.
The senior researcher at Pew, Alex Horowitz, also goes on to explain that the due amount for the title loans often comprise almost half of the borrower’s monthly paycheck. Losing 50% of one’s income is too much, and the borrower would rather renew the loan than lose that much money in a single payment. Also, the borrowers feel compelled to keep renewing for fear of losing their vehicles, even if the payments are way beyond they can afford, Horowitz adds.
Most borrowers stay in their title loans for around five months. They often get over the loan and claim the title back when there’s an opportunity for some cash infusion, such as tax refund and commissions. Some people also needed to ask for some financial assistance from family or friends to finally pay their title loans off.
Payday Loans and Title Loans are Predatory Loans
Despite the costs and financial consequences, payday and title loans are still two of the most popular quick-cash respite for emergencies. The industry has grown so much over the years, despite the moves on regulating them.
It’s also hard to discount the respite that payday and title loans provide to people who are in dire need of instant cash, but it doesn’t mean that they’re always the best choice. If you are in constant financial struggle, it’s time to inspect your financial habits and do what you can to improve your circumstances.
Instead of turning to these loans each time, consider saving a small portion of your paycheck each time. You can build up savings over time which comes in handy for unexpected urgent expenses such as car repairs, emergency trips to the ER and other essential bills. If you find it difficult to save from your income, consider increasing the income itself. You can take a second or weekend job so you can save some money or have some extra money left to pay off your debts.
If you really need a lean, get a personal loan instead. They have lower interest rates and the installment payment scheme is more manageable. Personal loans are also available for people with bad credit, and several lenders are employing quick approval process so you can get the funds as soon as a couple of hours or within the business day. The significant difference is that personal loans are available at friendlier interests and terms and don’t require collateral.
Desperate times call for desperate measures, and it’s understandable if payday and title loans have crossed your mind at one point or another. These loans do give you some breathing room and quick solution, but you need to pay them off in full as soon as you can. Delaying your payments means prolonging your high-interest rate repayments, which over time, put you deeper into the debt hole.
Many borrowers have found it hard to climb out of that hole, resulting to default and/or repossession of their vehicles. Additionally, these debts also add more stress and pressure in their financial life.
If you want to take payday and title loans, proceed with caution. Better yet, explore cheaper and friendlier alternatives to prevent these ugly scenarios from hurting your finances.
Importantly, cultivate better and healthier relationship with money so that these loans only become the last resort. Unexpected expenses will always catch you by surprise, so it helps to have a plan in place, just in case.
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