Car title loans are popular short term loans for borrowing money using a vehicle. They are secured loans, meaning the vehicle is put up by the borrower as collateral for the loan. Car title loans have changed over the past several years.
This article discusses those changes, as well as typical interest rates for title loans today and how interest charges accrue. This article will discuss the two main types of title loans and interest at a high level.
Title Loans – History
Before we discuss how interest works for title loans today it is important to first bring up how most title loans were structured in the past. Most title loans ten or so years ago were very short term loans with either a fixed fee that translated into a high Annual Percentage Rate (APR) or a short term loan with a monthly rate that translated into a very high APR.
By very short term, we mean 15-30 days. This was the typical time you had to repay a title loan. We bring this up because many articles online today still depict title loans with these types of repayment terms and rates.
While these loans do still exist in some states; they certainly do not represent the entire title lending industry. Additionally, with the increase in online title loans and auto equity loans, these very short term loans are becoming less popular. We expect this trend to continue.
Interest Rates for very Short Term Title Loans
The 15 – 30 day loans mentioned typically had (or have) very high interest rates when expressed as APR. These can be in the range of 200% – 300%.
To get around advertising these types of rates they are usually just listed as a fixed fee or monthly rate. For example, instead of 250% APR, the fixed fee would be $200 for a 30 day $1,000.00 loan; or a one month loan with a monthly rate of 25%.
Short Term Rollovers
The major drawback to single payment short term loans is the roll over of the loan. The borrower is given the option at the end of 30 days to pay the interest due and roll over the principal for another 30 days.
Doing this several times can significantly add up. What makes this worse is no principal is paid, so the borrower still owes what they borrowed even after making multiple payments.
Using the $1,000.00 loan example with a $200 payment for 30 days, if the loan is rolled over 4 times, the borrower will have paid $800 and still owe $1,000.00. This is where monthly term loans can make loans much better for borrowers.
Monthly Payment Title Loans
Many title loans today are monthly payment loans. This is especially true when it comes to completely online title loans. These monthly term type loans are available in many states today.
Some are marketed and called other names, such as auto equity loans, or consumer loans secured by the vehicle title. They are usually lumped under the term Title Loans for simplicity and all secured by the vehicle.
Interest Rates for Monthly Term Loans
Interest Rates for monthly term loan type title loans are generally lower than single payment loans. This is for several reasons. One, the loan is amortized over the loan term.
This makes it is easier for the lender to charge lower interest with the same risk. Another is the increased competition in this space, with more online title lenders charging lower rates than the typical single payment lenders.
While many of the larger lenders still charge very high (15% +) monthly rates, it is not uncommon to see lower rates from other lenders. This is where shopping around can save you a significant amount of money. Feel free to use our car title loan calculator to compare different interest rates and loan terms.
Benefits of Monthly Term Loans
The major benefit of a monthly term loan, when compared to the 30 day single payment loan, is that they are generally easier for the borrower to repay. Instead of having to come up with the entire loan amount, plus interest and fees, in one month, the borrower has many months to do so.
Additionally a portion of each monthly payment is applied towards the principal of the loan, which reduces the principal balance. This is referred to as loan amortization and explained in detail with examples in our title loan interest guide.
This means after making four payments, the borrower owes less, in some cases much less, than the original principal borrowed. If we use the Title Loan Calculator at Fast Title Lenders to calculate a 6 month $1,000.00 loan; we can see the monthly payment is $216.32.
After making four payments our principal is reduced to $385.75. Compare this to the previous example, where after four payments the borrower still owed $1,000.00, and you can see how a monthly term loan would be easier to repay.
Loan Term Lengths and Affect on Cost
Generally increasing any loan length will reduce the monthly payment. This is often done with new car purchases to make the monthly payment affordable for the buyer. This is also true for title loans, but only to a point. Car title loans are meant for short terms.
Lengthening a title loan can make repayment very expensive. Worse, the monthly payment decreases only slightly after about 24 months. So the borrower does not necessarily get the benefit of a lower payment with the longer term.
Instead, they end up paying several times the initial loan amount in interest charges. We provide some examples in our post about why title loan are short term loans. It is worth reading before committing to a longer term loan.
If you are shopping for a title loan it is worth taking a look at our complete guide to how to get a title loan. Given the number of articles online today describing all title loans as 30 day 300% APR loans, we can understand how many are confused and not aware that monthly term loans, with easier to repay terms, even exist.
If you are considering a title loan, do yourself a favor and do a bit of research first. Remember to read multiple sources as bias, from lenders and competitors to lenders, does certainly exist.