If you’e ever had a car title loan then you probably understand how expensive they can be. Although, what you may not be aware of is a recent trend with online title loans. This should make you think twice about your next title loan. Lenders are extending the loan terms to three and even four or more years. This may not seem like a big deal, until you actually see what these loans look like on paper.
Like all loans, borrowers tend to focus on the monthly payment rather than the total cost of the loan. Lenders are counting on this. Car prices have risen substantially over the past decade and so have new car loan terms. According to Lending Tree, the average auto loan term is 69 months for new cars and 65 for used. When the interest rate is low, this is not a major issue. But when you increase the interest rate with the loan term, costs get out of control quickly.
The results of a high interest loan amortized over 36–48 months can be shocking. Yes, car title loans are expensive. However, they should not be 3–6+ times the original principal of the loan. This simply makes the loan nearly impossible to repay and in many cases more expensive than the car used to secure the loan.
Additionally, the larger the loan the more interest for the lender. In some states, like California, lenders have high minimum loan amounts and minimum loan terms. Unfortunately for the borrower when you combine high minimum loan amounts, high interest rates, and a long term you get a staggering amount of interest.
Borrowing $1000 for a few months at a high interest rate is repayable. Borrowing $3,000 (the minimum is $2,600 for many California lenders) for 36 months will cost over $8,000 using an interest rate on the low end of the scale for title lenders.
The sad part is the monthly payment is not reduced by a meaningful amount for a 48 month title loan versus a 24 month title loan. When you amortize a high interest loan over 48 month, the first half of the loan is mostly interest payments.
Let’s look at the monthly payments for a $3,000 title loan with three different interest rates over three loan terms. For the low end of the scale we’ll use 7% per month (84% APR and low for title loans). The middle 10% per month (120% APR, average for title loans). On the high end we’ll use 14% per month (168% APR, on the higher end but some lenders charge even more).
As you can see, the monthly payments decrease between a 12 month and 24 month loan, but after that they do not decrease noticeably. The difference between the monthly payment for a 24 month loan versus a 36 or 48 month loan is negligible. More important is the total cost of the loan. Let’s take a look at the costs of the same $3,000 car title loan, with the same interest rates and same loan terms. As you can see from the charts, the amount of interest charged on longer term title loans is beyond excessive. A 48 month loan at the low end of the interest rate scale costs over $10,000 to repay, and over $20,000 on the higher end of the scale.
Even for the lower rate the 36 and 48 month loans are excessive. With 14% per month (168% APR) they are simply not feasible (many lenders charge more than this).
How do you avoid this? The easiest answer is don’t get a title loan, but that doesn’t help those who have no other option. Car Title Loans do serve a purpose and provide a source of emergency funds for those without other credit options. If you do need to get a title loan keep the amount as small as possible and repay the loan as soon as possible.
Do not agree to a long term title loan with any sort of prepayment penalty. If you do end up with (or already have) a 36+ month car title loan make extra payments, early payments, and always pay more than the minimum monthly payment. Make it a priority to pay the loan off as soon as possible.
Next time you decide to get a title loan remember these charts and keep the term short. Also, don’t be afraid to ask for a lower interest rate.