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Installment loans vs. title loans: What’s the difference?
When — and if — you can benefit from one of these short-term loans.
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.
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Installment loans vs. title loans: How much can I borrow?
| Installment loan | Title loan |
|---|---|
| Typically between $1,000 and $5,000 | Typically 25% to 50% of your car’s value |
Installment loans can go for than $500 or up to $10,000, but you’ll generally find one somewhere in 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 can typically borrow from $100 to $5,000.
Installment and title loans often come in similar amounts, but you risk losing your car if you default.
Installment loans vs. title loans: What are the repayment terms?
| Installment loan | Title loan |
|---|---|
| Three months to three years | Up to 30 days |
Installment loan terms typically 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 a longer term also means you’ll pay more in interest.
Car 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 it could 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?
| Installment loan | Title loan |
|---|---|
| 25% to 100% APR | 300% APR and up |
Both installment and car title loans can be very expensive. A three-digit APR isn’t unheard of with either option, though installment loans can sometimes be slightly less costly. 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. 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?
| Installment loan | Title loan |
|---|---|
| Varies by lender | Varies by lender |
You’ll probably pay a fee as soon as you take out an installment or auto 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 lenders
Both auto 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?
| Installment loan | Title loan |
|---|---|
| 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 car 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 I pick?
Both installment and auto 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 car title loans.
Alternatives to installment loans and title loans
Not sure if either is right for you? Consider these alternatives.
- Payday alternative loans (PALs). Some federal credit unions offer PALs as an affordable short-term loan option. Here, rates are capped at 28%, you can borrow up to $1,000 and terms range from one to six months. But they not every credit union offers them, so they can be hard to find.
- State assistance. Depending on where you live and your income, you might be eligible for financial assistance from your local government. Check out our article on payday loan alternatives for more details.
- Friends and family. If you’re in a financial pinch and can’t qualify for a loan from a lender, your social circle might be willing to help out.
- Payday loans. This short-term loan has the fast turnaround time of a title loan but doesn’t require collateral. Like installment and car title loans, these are extremely expensive and should treated as a last resort. You also can’t typically borrow more than $500, depending on your state.
Bottom line
Both auto title and installment loans can be extremely expensive and come with a fast turnaround time. And with a title loan, you could end up losing your car.
But if you need money fast and don’t have other options they could help cover an emergency expense. To learn more about how short-term loans work, check out our guide.
Frequently asked questions
What does it mean to default on a loan?
When a loan is at risk of default, it means that there’s a possibility the borrower won’t be able to fulfill their obligation specified in the loan contract. For title loans, this means your car can be repossessed. For installment loans, your lender will likely sell your account to a collection agency or hire a debt collector to try to get the money you owe them.
What is an origination fee?
An origination fee is a fee charged by a lender for taking out a loan. The amount you pay is usually deducted from your loan before you receive your funds. For instance, if you borrow $500 and your lender charges an origination fee of $15, you would receive $485.
How can I start getting out of debt?
Start by contacting a counselor at the National Foundation for Credit Counseling. Your counselor can help you identify and address the structural issues that keep you in debt — for example, the lack of a budget or overspending.
Are installment and title loans better than payday loans?
It’s difficult to say which type of loan is “better” — all three types are well worth avoiding because they’re often wildly expensive. We recommend looking into other options like personal loans or finding side gigs to cover you in a cash shortfall.
Why are installment loans and title loans so expensive?
These loans are usually extended for a short amount of time, so lenders want to ensure they’ll make a significant profit from the interest over the short repayment period.
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.
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