Car title loans are a necessity for many with equity in their vehicle and no readily available funding source. Sometimes the unexpected occurs, and to cover the cost you borrow against the equity in car, SUV, truck, or motorcycle.
After all, online car title loans are very easy to both apply for and get funded. The biggest problem many borrowers have with title loans is that they can be expensive.
Some title lenders charge very high rates which can make the loan very costly and difficult to repay. The costs of a title loan can get out of control quickly especially if the loan is for a longer term.
The best part of any title loan is making the final payment and getting your title back. Some title loan companies (not all) charge very high interest rates and/or fees (learn more about title loan fees). This can lead to very expensive loans that are no fun to try to repay.
So how can you pay off your title loan faster? There are a few ways to do so and save quite a bit of money in the process. They require some understanding of how title loan interest works and a bit of discipline, but can help get your title back faster.
To explain how these tips work, we need to understand the basic concepts of title loan interest. First, we should understand the daily interest rate.
Consider a Title Loan Refinance
If you happen to have rushed into a title loan and are stuck with a very high interest rate, consider a title loan refinance. It may be possible to reduce your monthly payment and total loan cost by refinancing your existing title loan at a lower rate. Regardless, the actions defined in this post can still be applied to pay off your loan faster.
The Daily Interest Rate
All simple interest loans have a daily interest rate. To calculate this rate all we need to do is divide the APR by 365 (for 365 days in a year). This gives us the rate of interest per day.
Knowing the daily rate is important because when we multiply the daily rate by the principal balance of the loan we get the cost of interest per day.
For some car title loans this cost can be significant. While a few days may not make a noticeable difference on a regular car loan, on a title loan it can have a noticeable affect. Let’s look at a quick example:
Daily Rate Example for a Title Loan:
Principal Loan Amount: $3,000.00
Loan Term: 12 Months
Our example loan is a $3,000.00 Title Loan for 12 Months with an Interest rate of 200% APR. Hopefully you found one of the best title loan companies like Fast Title Lenders with a much lower rate than 200%, but many lenders charge this rate and some charge even more. For purposes of this explanation we’ll use it.
Get the Daily Rate
To get the daily rate, we simply divide 200% by 365 and get 0.548%.
Why is this important? The daily rate will stay the same throughout the loan on the vast majority of title loans. Having the daily rate will let us calculate the cost of interest per day at any time during repayment of our loan.
Interest Cost per Day
Now that we know our daily rate we can calculate the daily cost of interest. To find out how much interest our loan costs, per day, we multiply the daily rate by the principal balance.
For title loans with monthly installments, the principal balance will be reduced each month as we make a payment. We’ll see how this works shortly.
Before we make any payments on our title loan our principal balance is the amount we borrowed, $3,000.00. To find out how much interest we are being charged, each day, we multiply $3,000.00 by our daily rate of 0.548% and get $16.44.
This means our title loan is costing $16.44 per day in interest. Interest will accrue each and every day. Understanding this is the first key to understanding how to pay your title loan off fast. Now we’ll move to the second: The principal balance.
Principal Balance Decreases over the Loan Term
Another concept we should understand when discussing loan interest is that the principal balance decreases over the loan term with each payment.
As we make each payment, a portion of our payment is applied to interest, and a portion to the principal. To pay our loan off faster, we want to reduce the principal faster.
Remember the daily rate stays the same, so to reduce the amount of interest accruing we need to reduce the principal.
Interest is based on the Principal
The next concept we need to understand is that interest is based on our principal balance. Most lenders can only charge interest on the outstanding principal balance.
Remember the daily rate from the previous example? It costs us over $16 a day when our principal balance was $3,000.00.
What happens when we reduce the principal of the loan? The daily cost decreases. Let’s say we’ve made some payments and now our principal is only $1,000.00. What is our daily cost of interest?
The APR is the same 200% and the daily rate the same 0.548%. So the daily cost is $1,000.00 x 0.548% = $5.48. This is significantly less than the $16+ at the beginning of our loan.
As the Principal Decreases do does the Interest
Finally, when we put together the fact that interest is based on the principal balance we can understand that as we reduce the principal, we also reduce the amount of interest the lender can charge.
The faster we can do this the more we can save. Let’s look at an explanation and then go over the tips on how to get our title back fast.
Title Loan Payment Explanation Summary
So now we know that the interest accrues at a daily rate based on our APR; and that as the principal is reduced so is the amount of interest we are charged. This means the faster we reduce the principal, the more we save on interest.
The more we save on interest, the more of our payment is applied to principal. It is a cycle that feeds on itself.
This cycle usually works against title loan customers. Late payments lead to extra interest and fees which mean less gets applied to the principal.
Understanding how this process works, and making it work in your favor can save us a lot of money.
As soon as we get our principal to $0, our title loan is paid off and we get our title back. So, how do we get this cycle to work in our favor?
*Need more information? Our explanation of how title loan interest works includes a full amortization example.
Three Ways to Pay off a Title Loan Fast
The three ways to pay off a title loan faster all have to do with reducing the interest accrued and reducing the principal balance faster. The sooner we do this in the loan process the greater the effect.
1. Make Early Payments
The first way to pay off a title loan fast is to make early payments. We saw from the first example that making one payment on a $3,000.00 title loan five days early saved us $82.20.
Early payments have an additional benefit. Not only do they lower the interest that accrues, but the $82.20 that we saved from making our payment early now gets applied to the principal.
This lowers our principal balance and reduces the daily cost for the next month. This means the next payment will also have more applied to the principal than what was shown in our original payment schedule.
2. Pay more than the Minimum
The second way to pay off a title loan fast is to pay more than the minimum amount due. Any amount paid in excess of the minimum amount is applied to the principal.
As we know by now, reducing the principal reduces the amount of interest we have to pay the lender. Every dollar we can put toward the principal will save us money and shorten our loan.
3. Make Extra Payments
The final way to pay our title loan off faster is to make extra payments. These can be any time in between our monthly payments. Any time we have extra money we should apply it to the title loan.
This will reduce our outstanding principal, which will reduce the daily cost, and make the cycle work in our favor.
Title loans are no fun to repay. This is especially true if you end up missing payments and paying late fees. Try to get in front of the loan, lower the principal, and pay off the loan as fast as possible.
The reward is getting your title back and not having to make those monthly payments anymore. High interest loans can cost a significant amount of money in interest charges.
Keep these to a minimum by making early payments, making extra payments, and paying more than the minimum. Doing these three things will hep make sure your title loan is paid off as fast as possible.