Car Title Loans vs. Payday Loans: What’s the Better Option in Canada?

With our fast-paced world and Canadian lifestyle, unforeseen financial disasters can arise anytime. An unanticipated car repair, a hospital bill, or a short-term cash flow crunch can come at you out of nowhere and leave you frantically searching for a quick way to resolve it. For a large percentage of Canadians, this ends up becoming very popular, yet often poorly understood financial products: car title loans and payday loans.

At Top Loans Canada we like to give our readers current and accurate information they can rely on to responsibly make the best financial decisions for their unique situations. So, this comprehensive blog post will serve as your first and last stop, covering the differences between car title loans and payday loans, weighing the pros and cons of both, and clearly guiding you to choose which option is the best for you, if any. We will cover important changes in Canadian regulations and responsible lending practices that have dramatically changed in the past few years.

The Rising Demand for Alternative Lending in Canada

The traditional banking system, with its stringent credit checks and lengthy approval processes, often isn't an option for those who need money fast, or for individuals with less-than-perfect credit scores. This is in part driving the rise in alternative lending in Canada. Many Canadians have high levels of debt, and the use of short-term finance is a reality for many people in everyday life, and lenders continue to innovate. A growing number of Canadians are now relying on online platforms for easy access to loans and applying online is often faster than in-branch options. While an enticing option, it does require education on the consumer side because, if used irresponsibly, this form of lending can carry a dangerous amount of risk.

There are also clear trends emerging within the Canadian lending market highlighting this shift. The alternative lending market in Canada is steady and growing; there are more Canadians who are self-employed, new to the country, or simply have non-perfect credit. We prioritize affordability of loans and focus more on a borrower's current financial status rather than solely on their past credit. This comes with increased regulatory scrutiny as we have recently seen with changes to the criminal rate of interest and caps on fees.

What is a Car Title Loan?

A car title loan, also known as a vehicle title loan or auto equity loan, is a secured loan that uses the title of the vehicle as collateral for the loan. In other words, you can borrow the funds against the value of your car. A lien is placed on the title of your vehicle, and accordingly you receive the financing.

How It Works

• Collateral: Your vehicle is the collateral for the loan.
• Ownership: You must own your vehicle outright (without any financing or liens on the title). We will accept a small amount of outstanding financing, but this is less common.
• Loan Amount: The amount you can borrow is very often based on a percentage of the value of your vehicle (often up to 50%). This also means that you can typically get a loan amount that is larger than you could with an unsecured loan.
• Repayment: The loan can have many different terms but they are typically very short-term, anywhere from a few months to a few years.
• Vehicle Usage: The cool thing is you get to keep and use your vehicle for the duration of the loan as long as you make your payments on time.

Key Features of Car Title Loans:

• Secured: Your car is being used as security which makes it a secured loan.
• Larger Loan Amounts: You can obtain a massive amount based on how much your car is worth.
• Lower Interest Rates (Relatively):The interest on these loans is competitive compared to bank loans. They are often lower than payday loans because they are secured. The APR could still be around 300%+, but is quite different between lenders, and provinces.
• Credit No Barriers: Since you are using your vehicle to secure the loan most lenders will look past bad credit.

What is a Payday Loan?

A payday loan is a small, short-term, unsecured loan. As the name implies, it is intended to be a temporary borrowing solution until your next payday.

Key Features of Payday Loans:

• Unsecured: There is no collateral to provide.
• Loan Amount: Payday loans are meant to be a much smaller loan. The maximum amount it can be varies based on provincial regulations, but often cannot be more than $1,500. Payday loans typically don’t happen for amounts more than a few hundred dollars.
• Repayment: It is a one-time repayment of the principal and a fee. The loan is typically intended to be repaid when you receive your next paycheque (usually within two weeks).
• Post-dated Cheque/Pre-authorized Debit: Typically, you are required to give your lender a post-dated cheque or provide pre-authorized debit to access your bank account for the total repayment amount.

The Canadian Regulatory Landscape

It is important to note that in Canada, both car title loans and payday loans are heavily regulated by every province. The criminal interest rate was set by the federal government, with former limits set in place to limit predatory lending. How these loans are regulated is up to each province or territory.

For example, Ontario has payday-loan-specific legislation that sets the maximum cost of the payday loan, and regulatory procedures that require lenders to be licensed and disclose maximum fees. So, remember to check your provincial or territorial regulations, and there is significant risk when dealing with unlicensed lenders for both car title loans and payday loans.

What's the Better Option? Making an Informed Decision

Deciding which is the "best" option is complicated because both options are pricey forms of credit and should only be used as a last resort when other affordable options are not available. The "budget" option will depend entirely on your unique situation, which includes factors such as how much you need and your ability to pay back.

Choose a Car Title Loan if...

• You need a larger sum of money for a large, one-time emergency. A car title loan is an option if you need an amount greater than what a typical payday loan can help with, for a situation like a significant home repair or a significant medical expense.
• You have a realistic, clear and detailed plan for repaying the loan. Your decision to make the car title loan should come from your ability to repay, not just the need for money. You must have a predictable stream of income and a budget that will allow you to make the monthly payments for the whole duration of the loan without the risk of default.
• You know you can meet the repayment schedule, meaning you can avoid the loss of your vehicle. The consideration of the risk of repossession is very real but communication is a solution.
• You must own a lien-free car that is fully insured.

Choose a Payday Loan if...

• When you need a small amount of cash to cover a short-term cash flow gap. A payday loan works when you have an immediate shortfall and you know you can pay the total loan plus all of the costs right on your next payday.
• No need to have a vehicle or other collateral to secure a loan.
• You have no other, less expensive options.

Important Considerations and Alternative Solutions

Before you choose either of these options, it's vital to explore all other avenues. Here are a few alternatives to consider:

• Personal Loans: If you're fortunate enough to have reasonable credit, a personal loan from a bank or credit union will have significantly lower interest rates and repayment terms that offer you more flexibility.
• Credit Cards: Receiving cash in advance via a credit card may be costly but often has a lower interest rate than payday loans. If you use it, pay this off as quickly as you can to avoid the high interest.
• Credit Unions: Many credit unions offer loans with small amounts of money to borrowers to use as an alternative to payday lending. These small loans often have better terms than payday loans and are intended for borrowers to build credit. If they have "Payday Alternative Loans" (which they sometimes do), these are loans to inquire about.
• Borrowing from Friends/Family: This can be an uncomfortable conversation to have but it is still an option for interest-free borrowing.
• Payment Plans: Reach out to your creditors to see if you can set up a flexible plan for your bill payment. Many will work with you in situations of financial hardship.
• Debt Consolidation: If you're struggling with a number of sources of high interest debt, perhaps a debt consolidation loan that will let you combine these debts into a single payment at a lower rate is a smart idea to consider.

The Bottom Line: Borrowing with a Plan

To stabilize finances, car title loans are in great demand over payday loans. However, if you choose to take a car title loan or payday loan, there is one critical element to ensure responsible borrowing: following through with a legitimate plan to pay it back.

At Top Loans Canada, we support financial literacy and healthy borrowing habits. It is important that consumers do their due diligence by comparing lenders, and reading all of the fine print before signing any loan documentation. The fees, rates, and penalties can differ significantly. Understand the complete cost of the loan and make a sound budget to guarantee you can make every payment on time. The ability to make informed long-term decisions with respect to your financial future are dependent on your ability to avoid being deceived and we can help!