Title Loans vs. Personal Loans: Which is Right for You?

Finding yourself strapped for cash and facing a large financial expense is a daunting experience that most people hope they never have to go through. However, financial difficulties are extremely common in the United States and around the world. In fact, 70% of Americans indicated that they feel financial distressed in their day-to-day life, going to show what a large problem this is.

When a person is strapped for cash, turning towards lenders for loans may seem like the next best choice. Of the potential loan options to consider, two of the most commonly decided upon are a title loan or a personal loan. Learn everything there is to know about these types of loans, including the benefits and drawbacks, to determine which is the right choice for you.

What is a Title Loan?

For those who have never heard of this type of loan before, a title loan is a short-term, typically thirty day, high-interest loan that gives a borrower access to a lump sum of cash. In return for having access to this lump sum of money, a person gives the title of their car to the lender until the loan is completely repaid. If the loan is not repaid in full, the lender will have the right to take control of the vehicle. Therefore, a title loan is a secured loan, as opposed to unsecured, given that it requires collateral.

Pros of a Title Loan

  • Quick access to cash, typically on the same day
  • Few credit requirements exist to take out a title loan

Cons of a Title Loan

  • The potentially for sky-high interest rates upwards of a 300% equivalent APR
  • Having loans on car titles means that the rights to the vehicle may be lost
  • Title loans can lead to a cycle of debt if a person is not careful

What is a Personal Loan?

On the other side of things, a person loan is an unsecured loan that gives a borrower access to a lump sum of cash, typically in the range of $10,000-$100,000. The interest rates associated with a personal loan tend to range from 6%-36% depending on a person’s credit worthiness, and the tenor tends to be somewhere between two to seven years.

Pros of a Personal Loan

  • Access to a large amount of cash depending on the needs of a potential borrower
  • Low interest rates for those who are credit-worthy
  • The potential for a long repayment period makes personal loans more affordable
  • There is no collateral required to take out a personal loan

Cons of a Personal Loan

  • Personal loan borrowing amounts are typically higher, making them less ideal for small expenses
  • A person may not be approved for a personal loan depending on their credit history
  • The funding times for personal loans is fast, but other loan options may be faster

Tips for Choosing the Right Type of Loan

Deciding between a personal loan and a title loan can be difficult, especially when they both seem to offer similar things from a 30,000-foot overview. However, the nuances of each loan type make them perfect for different types of people. Those who have smaller expenses, typically less than $10,000, will be better suited with a title loan given that it is geared towards smaller borrowing amounts.

On top of this, using a title loan to borrow amounts over $10,000 isn’t ideal given the large interest rate and quick repayment period associated with the loan. To that end, having an expense larger than $10,000, along with already having an established credit history, means that a personal loan will likely be the better choice. Specifically, ask the following questions to determine which of the two loans types is best for you:

  1. What is the purpose of the expense and the amount of money needed to meet the expense?
  2. Can the repayment of the expense be made within a 30-day period?
  3. Do you have an established credit history with a good store?
  4. Which lender offers the best interest rate based on the terms of the potential loan?

The Bottom Line

While a title loan or personal loan may not be the right choice for everybody, there are a select few who may be able to get the most use from these loan types. Consider your current financial circumstances to determine whether or not you can afford the loan, specifically looking at whether you can afford the repayments before a serious amount of interest begins to accrue.