When you're in a financial bind and need money right away, it can be tempting to turn to payday or title loans. But these types of loans can be a slippery slope, as many borrowers find themselves unable to repay the loan in the typical two-week repayment period. This can lead to a cycle of repeated loan extensions, with fees continuing to accrue. According to a study by the Global Financial Literacy Excellence Center at George Washington University, 42% of millennials have used methods such as payday loans as a way to deal with debt.
Unlike a car title loan, a traditional auto loan, or a mortgage, payday loans are not secured. This means that if you don't pay, the lender cannot seize your property as a result. It's important to understand that there are other loan options available to you, such as Alternative Payday Loans (PAL), even if you have bad credit. Credit cards may have high interest rates, but they are still a fraction of what you would pay for a payday loan or title loan.
Payday loans generally only report your debt to credit bureaus if they are sent for collections. Some versions of payday loans in some states allow you to obtain lower interest loans that can be paid in installments and that report to credit bureaus. Your employer may also offer short-term loans in emergency situations without charging fees associated with payday loans. Unfortunately, payday loans don't help you build credit because they don't usually report to credit bureaus.
And like payday lenders, title lenders impose the largest expenses when you don't repay the loan on time. Asking which type of loan is better is like asking which illness is best to catch in winter - neither is ideal.
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