Car title loans in Virginia are monthly term loans with simple interest, just like many other monthly term loans (car loans, mortgages, etc.). Title lenders cannot charge you interest in advance, and can only charge interest on the outstanding principal balance. Title loan interest can be confusing and lenders usually quote Monthly terms, versus APR. The maximum monthly rate a lender can charge in VA is between 15% – 22% and is based on the value of the loan. The following explains how interest works on a title loan with an example of how to calculate the interest yourself.
How to Estimate the Annual Percentage Rate (APR):
The first step in learning how title loan interest works is to understand the difference between the monthly interest rate and the APR. To get an estimate of the APR, when you have the monthly rate, you can multiply the monthly rate times 12 (for 12 months in a year). For example, a loan with Fast Title Lenders with an 8% monthly rate has a 96% APR (8 x 12 = 96). A loan with a monthly rate of 17% has an APR of 204% (17 x 12 = 204). Similarly, a loan with a 180% APR has a monthly rate of 15% (180 / 12). It is important to know which rate (Monthly or APR) the lender quotes when comparing loans.
How to calculate Title Loan interest:
A common mistake when calculating title loan interest is multiplying the APR times the amount borrowed. Using a $1000 loan as an example, if we multiply by 96% (0.96), we get a total of $960. This will only be correct if we have a 1 year loan and make one payment and the end of exactly one year. We know from using the title loan calculator that the total interest on a 1 year, $1000 loan, at 96%, is $592.34. This is significantly less than the $960 we got when we multiplied $1000 by 96%. Why is there such a big difference?
The reason is we are making monthly payments of both principal and interest. The portion of the payment that applied to the principal reduces the outstanding principal balance. Remember title lenders can only charge interest on the outstanding principal. As the principal decreases so does interest that accrues each month. Similarly, as the interest accrued is reduced each month, more of the monthly payment is applied to the principal the following month (we cover this in the loan amortization example). To determine the amount of the monthly payments and how they are applied to the loan the lender amortizes the loan over the loan term.
What is Loan Amortization?:
Monthly term loans that consist of principal and interest are amortized over the loan term. Basically this means you make the same monthly payment every month, only the amounts that go to principal and interest change every month. As explained earlier, you only pay interest on the outstanding principal balance. When you make your first payment, part of that payment is going to interest, and part to principal. The part that goes to principal reduces your outstanding principal balance, and the month 2 interest accrued is less than month 1. Using a 12 month $1000 loan at 8% per month (96% APR), let’s take a look at how this works:
Loan Amortization Example:
A $1000.00 loan for 12 months, with a monthly rate of 8% (96% APR), has a monthly payment of $132.70. First we calculate the interest accrued that month. Then we subtract that amount from the monthly payment to get the amount that applies to the principal:
Month 1 Payment: $132.70
Principal Balance: $1000.00
Interest Payment = Principal Balance x Monthly Interest Rate = $1000.00 x 8% = $80.00
Principal Payment = Monthly Payment – Interest Payment = $132.70 – $80.00 = $52.70
Principal Balance = Beginning Principal Balance – Principal Payment = $1000.00 – $52.70 = $947.30
So now that we see how the first month’s payment is applied to principal and interest, let’s take a look at month 2. Remember, the lender can only charge interest on the principal balance. For month 2, the principal balance is $947.30, because $52.70 of the month 1 payment went towards the principal.
Month 2 Payment: $132.70
Principal Balance: $947.30
Interest Payment = Principal Balance x Monthly Interest Rate = $947.30 x 8% = $75.78
Principal Payment = Monthly Payment – Interest Payment = $132.70 – $75.78 = $56.91
Principal Balance = Beginning Principal Balance – Principal Payment = $947.30 – $56.91 = $890.39
Month 3 Payment: $132.70
Principal Balance: $830.39
Interest Payment = Principal Balance x Monthly Interest Rate = $830.39 x 8% = $71.23
Principal Payment = Monthly Payment – Interest Payment = $132.70 – $71.23 = $61.46
Principal Balance = Beginning Principal Balance – Principal Payment = $890.39 – $61.46 = $828.93
To calculate Month 4 we would do the same thing using $828.93 as the principal balance. This same process continues until the principal balance is $0.00. Use our title loan calculator to view different loan amounts and terms and the amortization schedules for each loan. Each payment reduces the principal balance and the interest. This is the reason you cannot simply multiply the loan amount by the APR to estimate the yearly interest. You will get a number that is not accurate. The full amortization table for the $1000.00 loan looks like this:
Month | Payment | Interest | Principal | Balance |
0 | $1,000.00 | |||
1 | $132.70 | $80.00 | $52.70 | $947.30 |
2 | $132.70 | $75.78 | $56.91 | $890.39 |
3 | $132.70 | $71.23 | $61.46 | $828.93 |
4 | $132.70 | $66.31 | $66.38 | $762.55 |
5 | $132.70 | $61.00 | $71.69 | $690.86 |
6 | $132.70 | $55.27 | $77.43 | $613.43 |
7 | $132.70 | $49.07 | $83.62 | $529.81 |
8 | $132.70 | $42.39 | $90.31 | $439.50 |
9 | $132.70 | $35.16 | $97.53 | $341.97 |
10 | $132.70 | $27.36 | $105.34 | $236.63 |
11 | $132.70 | $18.93 | $113.76 | $122.87 |
12 | $132.70 | $9.83 | $122.87 | $0.00 |
Totals | $1,592.34 | $592.34 | $1,000.00 |
When we look at the table notice how each month the amount of the payment that is applied to the principal increases every month, and the amount of interest accrued decreases. Keep in mind that this title loan interest example is related to monthly term loans like we have in Virginia. Some states have 30 day loans, interest only payments, and other rules. Make sure to check the laws in your state.
Daily Interest Accrual Adjustments:
The exact amounts may differ slightly from the above example for a few reasons. The first is the exact day the payment is made. Lenders generally accrue interest daily, so if you make a payment early or late, this affects the amount of interest that accrues. Additionally, there may be a very small difference based on whether the lender uses a 365 or 360 day year. Finally, there are fractions of a cent that get rounded and can slightly increase or decrease the numbers. For the purpose of understanding how title loan interest works, we assume these variations are very small.