Car title loan interest charges are often confusing to many borrowers. One of the most confusing aspects when getting a title loan is the interest rate term.
Since the interest rate determines the interest charges, making sure you fully understand this is critical to understanding what your title loan will cost and why.
The confusion is usually related to the fact that most title loans are communicated using the monthly interest rate versus the more common Annual Percentage Rate (APR).
Because of this it can be very confusing to determine what rate the lender is actually charging.
This confusion often results in title loan customers being surprised by the actual cost of the loan. To minimize this confusion, and even eliminate it, make sure to understand the monthly rate.
Reason for Confusion:
The main reason for confusion is the use of the monthly interest rate by most car title lenders. This includes both iin person or storefront lenders and online title loan companies.
Many borrowers are not familiar with the monthly interest rate and confuse it with the more common Annual Percentage Rate (APR). After all, the APR is what most other loans use.
Monthly Rate – Where did it Come From?
So where did the monthly rate come from and why do lenders use it if it is so confusing?
The answer is when title loans first started the majority where for a period of 30 days or one month. This made using the monthly interest rate relevant. It also made the finance charge easier to calculate.
For example, a $1,000 loan with a monthly rate of 10% had a total interest of 10% of $1,000, or $100.
Since most loans where one month, the monthly rate made a lot of sense. It was fairly easy for both lenders and borrowers to estimate the finance charges for the loan by multiplying the monthly rate by the principal.
Over time, title loans started to both roll over for months and also some states began introducing monthly installment loans. These loans are amortized and have monthly payment.
Most of us are used to comparing these loans using the term Annual Percentage Rate (APR).
Annual Percentage Rate (APR)
Why is this confusing? Because just about every other loan is quoted using the more common and more standard Annual Percentage Rate, or APR.
When you go to buy a new car, house, or just about anything else, interest is communicated using APR. This makes it easy to compare different loans from different lenders.
What is a Monthly Interest Rate?
A monthly interest rate is the rate that interest accrues each month. It is similar to the APR in the sense that it applies to a fixed timed period and is expressed as a percentage.
Title Loan Amortization
Much of the confusion with car loans and APR can be directed towards amortization. This is when a loan is broken into equal monthly payments. Most loans we are used to are amortized. A few examples include:
- Cars – New and Used
- Homes – Mortgages are amortized
Many loans with monthly installments are amortized. This is why you can’t simply multiply the APR by the principal balance to calculate interest for an amortized loan. The principal balance changes every month.
You can, however, multiple the principal balance times the monthly interest rate to calculate interest for that month. This makes some title loans easy to calculate once you understand that concept. Read our tutorial for a full explanation on title loan interest.
Additionally, title loans are available for more than just cars, This includes motorcycles, trucks, and classic cars.
Using the APR
Unlike the monthly rate for a 30 day loan where we could simply multiply the loan amount by the total borrowed; with an amortized loan we cannot do this. To illustrate, let’s take a $1,000 12 month loan with a 120% APR.
If we multiply 120% by $1,000 we get $1,200. Using this math and logic, this would mean the loan cost us $1,200 in interest. Unfortunately this is not the case.
The reason: Because the loan is amortized we are making payments every month. A portion of the payment is applied to the principal each month, which reduces the principal.
This reduction in principal reduce the amount of interest that accrues each month. This process continues until the loan is paid off. To learn more and see some examples see our post on how to pay off your title loan fast.
Comparing Title Loans
One important aspect to consider related to interest rates is to make sure to compare APR to APR and Monthly Rate to Monthly Rate. If one lender charges 12% per month, and another charges 100% APR, the lender that charges 100% APR is actually the better deal.
You can convert the Monthly Rate to APR by multiplying the monthly rate by 12. You can also convert APR to the Monthly Rate by dividing by the APR by 12. The table below shows some examples:
|Monthly Rate %||APR %|
Truth In Lending (TIL) Statements and Title Loans
The majority of title lenders are required to provide Truth in Lending (TIL) statements as part of the title loan agreement. The TIL statement standardizes the cost of credit and provides a summary of important loan information including the interest rate. Learn how to use a TIL to shop for a title loan.
Online Title Loan Interest Rates
The same considerations apply to online title loans as in person loans. Make sure to understand the monthly rate and how to cover to APR when you need to compare lenders. Also, read the TIL statement the same way.
Car title loan interest can be and often is confusion. One way to limit and help minimize the confusion is to understand the difference between monthly interest rates and APR.
This is the first step to understanding how title loan interest works. We have a page dedicated to explaining title loan interest. Doing so will make sure you are aware of what you are being charged each month and why.