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Understanding car title loan interest rates

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Understanding car title loan interest rates

APR (annual percentage rates). This is the interest rate based on an annual total. Simple to do this.. Take an amount and multiply it by this number and you will know the interest you will be paying over the course of the year.

EXAMPLE: If you had a 29% interest rate and you borrowed $5000, then your yearly interest would be $1450 ($5000 x 29%).

MPR (monthly percentage rates).  Car Title Loan companies have HIGH interest rates. They can go from 29% (lowest we have seen) to 200-300%. Average is about 87% to 97% APR. Because of this, when this is told to the consumer it looks freaky high so instead, most title loan companies break that number down to a MPR. It sounds better to say the monthly interest rate is 8% then it is to say the yearly interest rate is 96%.

So we can understand this interest rate better as it applies to a loan, we must look at how the MPR is applied. Not all months have the same amount of days in it. One has 28 days while others 31 days. If a rate is MONTHLY, then you would need to do this math:

Let’s say you have a $5000 loan at 8% MPR. Also the month we will use is February which has 28 days.

8% divided by 28 days means the DAILY interest THAT MONTH is .28

If you had a loan balance of $5000 then each day in INTEREST is for February is $13-14 a day.  In a year, that would equal $4745 in interest.

Let’s say you had the loan out for 2 weeks. That would be $189 to borrow $5000 and that’s not so bad at all for getting money with bad credit, and sometimes in hours.

Let’s say you didn’t repay that loan for 2 years! That would be $9490 not counting the $5000 you have to  pay back. OUCH!

So what did we learn here?

  1. Title Loans are not by nature short term loans however if there is no prepayment penalty, paying if off fast is a really good way to get fast cash at a reasonable rate.
  2. Never take a title loan out and take the full term to pay it off. You will be paying so much money for it you will dislike the experience.
  3. ONE POINT on that monthly interest rate means a LOT of money so always try and get that as low as possible and don’t be afraid to ask… or even demand. They don’t want to lose you to their competition even if it means they make less money.