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 or pre-payment penalties. Title loan interest can be confusing and lenders usually quote Monthly terms, versus APR. To estimate the APR you can multiply the monthly rate times 12 (12 months in a year). For example, a loan with Fast Title Lenders at 8% monthly rate is 96% APR (8 x 12 = 96). A loan with a monthly rate of 17% is 204% APR (17 x 12 = 204).
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, multiple by 96% (0.96), and we get a total of $960. The only time this is correct is if you make one single payment at 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, significantly less than the $960 we got when we multiplied $1000 by 96%.
Why is there such a big difference? The reason is monthly payments of both principal and interest a paid each month, so the principle is reduced each month. The interest charged is based on the outstanding principal balance. Payments are applied to both principal and interest. This reduces the outstanding principal, which then reduces the interest for the following month. The amount of the monthly payment that goes towards your principal balance increases. The lender amortizes the loan over the loan term and uses a formula to calculate the required monthly payments.
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 has a monthly payment of $132.70.
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, you are 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
To calculate Month 3 we would do the same thing using $890.39 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.