No matter how much you plan, life can always throw you a curveball. Finding yourself in a pinch and in need of cash that you don’t have is always a troubling experience. Fortunately, there are a number of financing options to consider depending on your background with debt.
Two of the most common types of loans for smaller, emergency expenses are title loans and personal loans. While there are similarities between the two, there are also notable differences that can make one or the other the right choice for different people. Let’s dive deeper into these two financing types:
What is a Title Loan?
A title loan is a secured short-term loan that allows a borrower access to funds in return for the title of their vehicle as collateral. For example, a motorcycle title loans direct lender will allow a borrower to take out a sum of money, to be repaid, and the borrower will provide them with the title of their motorcycle. If the borrower is unable to repay the loan, the lender takes ownership of the motorcycle.
Title loan lenders tend to charge around 25% of the value of the loan on a monthly basis as a financing fee. This means that if a borrower takes out $2,000 with a 25% financing fee, they are responsible for paying back $2,500 by the end of the repayment period.
What is a Personal Loan?
A personal loan is a short-to-long-term loan. Similar to a title loan, it is a lump sum of money borrowed that is to be repaid over time. Unlike title loans, personal loans have fixed monthly payments that include any interest or fees. Personal loan interest rates are between 6-36% on average, fluctuating based on factors such as credit history, income, credit score, and more.
While personal loans can be both secured or unsecured, the vast majority are unsecured with no collateral required.
Differences Between Title Loans and Personal Loans
While title loans and personal loans may seem similar on the surface, there are some key distinctions that can help you determine which is right for you:
Loan Amount
The first difference between a title loan and a personal loan is the amount a borrower can take out. The average amount of a title loan hovers anywhere between 25-50% of your vehicle’s value. For most people, this equates to being able to borrow anywhere from $100-$5,500 depending on the state of their vehicle.
On the other hand, personal loan borrowings typically start at $1,000 and can get as high as $100,000. The reason for this higher amount is that, given most personal loans are unsecured, there is no valuation based on collateral.
Repayment Period
Title loans are structured with small repayment periods, typically with payment due in full within 30 days. Personal loans have longer repayment periods, with the average tenor falling somewhere within two to seven years. This can make a personal loan either short-term or long-term depending on the amount borrowed.
Application Requirements
For title loans, minimal information is required during the application. Besides any personal information, you may be asked to provide proof of income and residency. Some title loan lenders may run a credit check, whereas others may not.
Personal loan applications require far more information to be approved. Beyond personal information, you will need to show:
- Proof of income (paystubs, tax returns, W-2, etc.)
- A good credit history and score
- Strong debt-to-income ratio
Between the two loan types, personal loans are harder to get approved for than title loans. Given most personal loans are unsecured, lenders require more information from the borrower.
Credit Score and History
Lenders may not run a credit check for a title loan considering the level of security and the small repayment period. This makes title loans enticing for those who may not have a strong history with credit.
To get approved for a personal loan with a fair interest rate, a credit score of 610-640 is generally recommended. Additionally, lenders would like to see that you have a strong history of repayment with debt.
Security
As mentioned briefly, perhaps the biggest difference between a title loan and a personal loan is the security. With a title loan, you are at risk to lose ownership of your vehicle if you are unable to repay the loan on time. For most personal loans, however, there is no collateral which means there is nothing a lender can take ownership of if a borrower fails to repay their loan.
How to Choose Between a Title Loan vs. Personal Loan
With all of the above factors taken into consideration, determining whether a title or personal loan is a better fit for your situation can be done by looking at some key questions:
- How much money do you need to borrow?
- Do you have a strong history with credit?
- What type of repayment period are you looking for?
- Do you care about collateral?
- Can you pay off the loan quickly or do you need more time?
In general, title loans are best for those who might be seeking a smaller sum of cash, typically under $5,000, and just don’t have access to that cash right now, but will in the near future. Due to the shorter repayment period, you shouldn’t take out a title loan if the sum of money you’re borrowing is an amount you won’t have for a long time. Title loans are also beneficial for those who may not have as high a credit score.
Personal loans are better for those who are seeking larger sums of money, usually above $5,000, that would require a longer time to pay off. Borrowers of personal loans tend to have higher credit scores, as lower scores can make the interest rate unfavorable and end up costing the borrower more in the long run.
For either loan you choose, never take out debt that you are unable to repay in-full and in a timely manner.
The Bottom Line
Sometimes an emergency expense is impossible to plan for. Medical expenses, car repair, necessary home repair, and more are all examples of expenses that may need to be taken care of right away. Regardless of whether you seek out a title loan or personal loan, always pay back your debt in full and on time to avoid extra interest or repercussions. With the right financing choice, you can confidently handle your expenses.
