If you’re in a cash crunch, installment loans and title loans are two options that may help.
When you’re struggling to keep your head above water, a short-term loan may seem like the best option, but that doesn’t make the choice easy. Title loans and installment loans offer different benefits and have unique downsides. Calculate the cost, the risk and compare your options to find the best solution to your budget problems.
What’s the difference between auto title loans and installment loans??
- Installment loans are paid back in monthly increments. Although still a short-term loan, terms usually last longer than an auto title loan, ranging from a few months to a few years depending on the purpose of the loan.
- Auto title loans use the title of your vehicle as collateral. Payments are usually due within 30 days or a few months, depending on your lender and the amount you borrow.
However, both types of loan are similar in many respects. They can be quite costly due to the short turnaround period and high APR, and many lenders won’t perform credit checks. If you need a quick injection of cash into your budget, they can be useful tools. But stay cautious. Many borrowers fail to repay by the due date and are forced to roll over their loan amount — making them even more expensive.
Compare your options for auto title and installment loans
Installment loans vs. title loans: How much can you borrow?
|Typically between $2,000 to $5,000||Typically 25% to 50% of your car’s value|
Installment loans may be for less than $1,000 or up to $10,000, but you’ll generally find one somewhere between the $1,000 to $5,000 range.
Title loans are a bit different. Because your loan amount is based on the appraised value of your vehicle, what you can borrow will vary by your lender and your state. On average, you may be able to borrow anywhere from $100 to $5,000.
Title loans can lead to larger loan amounts, but you risk losing your car if you default.
Installment loans vs. title loans: What are the repayment terms?
|Six months to a few years||Due within in 30 days|
Installment loan terms range from three months to three years, though the exact term you get will be based on your lender and your state of residence. This gives you multiple months to repay the loan, but it also means you’ll be paying hundreds of dollars in interest.
Title loans, on the other hand, are extremely short-term. Many lenders set the due date at 30 days, though some lenders will allow a few months to fully repay. This, too, can get costly since your lender may charge you rollover fees for extending your loan.
You’ll have more time to pay back an installment loan, but depending on your situation, this may end up costing you more money than a title loan with a quick turnaround time.
Installment loans vs. title loans: What are the interest rates?
|Typical APRs range from 25% to 100%||300% APR and up|
Both installment and title loans can be very expensive. A three-digit APR isn’t unheard of. Be wary when applying for either, and make sure you can repay your loan on time. You should also search for a lender that doesn’t have a prepayment penalty. This means you can pay your loan off early without being charged a fee, and less time on your loan term equals less spent on interest, which can reduce the overall cost of your loan.
Installment loans vs. title loans: How much are the fees?
|Varies by lender||Varies by lender|
You’ll probably pay a fee as soon as you take out an installment or title loan. These may include origination, processing and insurance fees. Whichever loan you pick, fees can add up to a substantial percentage of the loan. For example, if you take out a $500 title loan, you could pay $125 in fees alone.
Understand how much you’ll pay in fees before taking out either type of loan. You may be surprised at how much you’ll be paying your lender just to borrow money.
Beware of predatory lendersBoth title loans and installment loans are marketed to customers with bad credit. These loans tend to come with extremely high interest rates and have fees that can land you into a debt trap. While this is commonplace, a predatory lender has a few more tricks that can deceive you. Here are some things to look out for:
- Guaranteed approval. There’s no such thing as guaranteed approval. Lenders who advertise this are often trying to make a quick buck off interest and don’t care about your ability to repay.
- Pressure to borrow more than you need. You should only take out a loan for the amount you need to get through whatever financial hardship you’re having. Lenders who push you to take out more money aren’t looking out for your interests.
- Loan renewal options. You may think that being able to rollover your loan if you can’t pay it back is a good thing, but this is an easy way for you to land in a debt cycle where you’re constantly renewing your loan or taking out more loans to pay for the first one.
- Upfront fees or payments. Don’t borrow from a lender that requires you to pay an upfront fee. This is often a scam. Application and origination fees are usually deducted from your loan funds before being given to you, not requested before you receive your loan.
- The lender approached you. If you’re getting flooded with texts and robo-calls asking you if you want to take out a loan — run. These could be a scam. Legitimate lenders will at most send you a letter or two in the mail. Anything more persistent should raise a red flag.
- Nontraditional payments. Lenders either require you to leave a postdated check or allow an ACH transfer from your bank account. If a lender is asking you to pay in gift cards, cash or another untraceable method, you might be dealing with a scam.
Installment loans vs. title loans: What are the requirements?
|Government-issued ID, regular source of income||Government-issued ID, title for car and proof of insurance|
When you take out an installment loan, you’ll need to present a valid ID and a source of income. Most reputable lenders will check your credit, though likely not through one of the big three credit bureaus. While you can get an installment loan from a lender that doesn’t check your credit, this will likely be a much more expensive option.
With a title loan, a lender will rarely check your credit, and you usually don’t have to provide much proof that you can repay the loan. The most important requirements are a lien-free title for your car, a valid ID and proof of insurance.
Which option should you pick?
Both installment and title loans can get you cash in a pinch, but they can be risky.
The title loan industry has a particularly poor reputation because it often targets individuals who don’t have the ability to repay and because a title loan requires that you use your car as collateral. If you don’t repay the loan, you may have your car repossessed.
Installment loans can be a mixed bag. Reputable lenders are out there, but in recent years installment loans have been widely extended without credit checks. As a result, they’ve trapped many borrowers in long-term debt, which is why they’re often associated with payday and title loans.
One of the biggest problems with title and installment loans is they can be extremely expensive. This often leads to miscalculating your ability to repay and potentially getting into deeper financial trouble. If you’re in a cash emergency, consider alternative options before settling on a title or installment loan.
Frequently asked questions
There may be better personal finance options for you
Short-term loans can be good in an emergency, but they may not fit your needs. You may qualify for a personal loan to help you through a rough financial situation.