Personal Loans

Personal Loans vs. Title Loans: Help Me Choose

If you need to borrow money, you may be wondering what kind of loan to get. Learn about personal loans vs. title loans and which one is right for you.
A woman searches for a personal loan on her computer late at night.
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By Gina Freeman
Updated on: August 31st, 2021

Personal loans vs. title loans: which one should you choose? Before you decide, you need to understand the difference.

  • Personal loans are unsecured. That means you don’t pledge an asset that the lender can repossess if you faul to repay your loan. Title loan providers, on the other hand, can take your car if you don’t meet the terms of your agreement.
  • Personal loans require an application, income verification, and a credit check. Title loans require you to put up your auto, RV, boat, or motorcycle title, but many lenders don’t verify income or even pull a credit report, according to Experian.
  • According to the Federal Trade Commission, personal loan interest rates typically top out at about 36%. Auto title loan rates average about 300%.
  • Personal loans take a few days for underwriting and funding, although you can often get preapproved in minutes. Title loan providers can fund your loan the same day, sometimes in less than an hour.
  • Personal loan terms require you to borrow at least $1,000 and the shortest term is one year. Title loan terms are much shorter, often between $100 and $500.

Both of these loans can be helpful. However, title loans work well in just a few situations, while personal loans can be the best solution for many financial problems.

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Personal Loans for Debt Consolidation

You may be able to pay a lot less interest on your credit cards or other high-interest accounts by consolidating them with a personal loan. There are a few advantages in doing this:

  • Personal loan interest rates are usually fixed, which makes budgeting easier.
  • Rates average about 7% lower than those of comparable credit cards.
  • Personal loans are installment loans. You can be debt-free at the end of your loan term.
  • Paying off credit card debt with a personal loan can increase your credit score immediately because it improves your credit utilization ratio.

However, getting a personal loan for debt consolidation can be problematic if you live beyond your means and run your credit balances up again. Get help from a reputable non-profit credit counseling service if you need help controlling your spending.

Personal Loans for Financial Emergencies

If you need expensive medical treatment, a car repair to get to work, or to fix your roof after a snowstorm, a personal loan can save the day. If you do not yet have an emergency savings account to cover at least two months of expenses, “fake it ’til you make it” by setting up a personal line of credit. Then, if the need arises, you just tap your credit line.

But what if you experience an emergency and don’t have a credit line? You can apply for a fast personal loan and get money in days. And if you already have a relationship with a bank or credit union, they might streamline the process and fund your loan as quickly as the following day.

Personal Loans for Your Business

Personal loans can make great business startup loans. Because personal loan vendors generally don’t care what you spend the loan proceeds on, you don’t have to untangle red tape and jump through hoops the way you do with SBA loans. And if your credit is good, personal loans can be cheaper.

If your business is already established, a business personal loan can get you through temporary cash flow glitches to meet payroll and pay vendors. A personal line of credit gives you peace of mind, keeping short-term squeezes from becoming long-term losses.

How Are Personal Loans and Title Loans the Same or Different?

Personal loans and title loans have very few similarities. They are alike only because they both provide money fast. Here are the ways in which they differ, and how those differences affect consumers.

How to apply

Applying for a personal loan is straightforward. You can do it online in most cases. You’ll need your employment, income, address and banking information. Many providers will allow you to prequalify by estimating your income, debts and credit score without pulling your credit report.

Complete and submit an online application. Be prepared to upload proof of identification and income online or through an app. Normally, lenders take a few days to verify your information and fund your loan.

Title lenders, on the other hand, often don’t check your credit at all. Typically, you provide your clear vehicle title, proof of insurance and a government-issued ID. Your state might also require the lender to check your income, residency or vehicle registration. You usually have to apply for a title loan in person because the lender needs to inspect your car, and you get your money right there.

Collateral

Collateral is property that you pledge to cover your loan. If you fail to repay the lender, it takes your collateral. Most personal loans require no collateral. The lender might sue you or send your account to a collection agency, but it can’t just take your property.

Title loans, on the other hand, are secured by your car. (You can typically borrow up to half of your car’s value.) The lender holds your title and may repossess your automobile if you don’t repay your loan. Some title lenders install devices on your car that will disable it if you don’t repay them. Others put tracking technology onboard so they can easily pick up your auto if necessary.

Interest rates

Interest rates for personal loans range from under 5% to about 36% per year. The rate you’re offered depends mainly on your credit score but also on the length of your loan and loan amount. Auto title lenders typically quote a monthly interest rate. The average is 20%, which translates to approximately 300% per year.

Impact on credit

Auto title lenders do not report to credit bureaus like Experian, TransUnion or Equifax. So if you miss a payment, it won’t directly harm your credit. It won’t help your credit score if you pay on time either.

Personal loan providers usually report your repayment history to credit bureaus. Paying a personal loan on time can help your credit score. However, applying for a loan with multiple personal loan providers can be harmful because every credit inquiry drops your score by three to five points.

Eligibility

Personal loan eligibility depends on your credit score, income, and debts. Many lenders set minimum credit scores and income. In addition, they examine your debt-to-income ratio, or DTI. DTI equals your total monthly debts like rent, car payments, credit card minimum payments, and other accounts divided by your gross (before tax) monthly income. Utilities and living expenses like food don’t count. Most lenders want to see a maximum DTI of 36% to 50%.

Auto title lenders often don’t check credit or employment. To be eligible for a loan, you need your title slip showing that you own your auto free and clear, a government ID, and proof of insurance. Some states require the lender to verify your income.

How to Choose Between a Personal Loan vs. a Title Loan

Because of the high cost of title loans, you should choose a personal loan any time it meets your needs and you can qualify for it. Personal loans work when you need money for just about any purpose, and you can wait a few days for funding.

However, there are times when a title loan might be your best option. For instance, some animal emergency hospitals won’t work on your pet without a deposit. Of course you’d put up your car to save your furry family member. You might need to get someone out of jail quickly, or get your car repaired ASAP so you don’t lose your job. Emergencies are highly personal, and yours might warrant borrowing against your auto title.

Frequently Asked Questions: Personal Loans vs. Title Loans

Are there personal loans with no credit check?

No. Personal loans require you to apply and authorize a credit check. Any loan advertised as a personal loan with no credit check is a payday loan, check advance loan, or an auto title loan.

Can I use a personal loan to pay off a title loan?

That is actually a good use for a personal loan. If you have to take out an auto title loan because of time constraints, you can save money by paying off a high-interest title loan with a low-interest personal loan.

Can I get a co-signer for a personal loan?

Many personal loan providers allow co-signers. If you have little or no credit history, or a poor credit score, of insufficient income to qualify on your own, bringing in a co-signer can improve your chances of loan approval.

Are there personal loans for people with bad credit?

There are personal loan providers that specialize in borrowers with lower credit scores. Other options include adding a co-signer or co-borrower with good credit.

About the Author

Gina Freeman writes about personal finance and has been featured on AmOne.com, The Mortgage Reports, MSNMoney, Fox Business, Forbes, The Motley Fool, and other fine websites. Her background includes tax accounting with Deloitte, over 20 years in mortgage sales and underwriting, systems consulting for Experian, and several years in bankruptcy law. Gina enjoys helping consumers make confident and intelligent financial decisions.