Understanding Simple Interest on Title Loans

If you are short on cash, you may be considering a loan. There is a great variety of loans out there, which can serve different purposes and are available against different types of collateral or without collateral.

If you have a bad credit score or your financial situation requires urgent cash, one of the best options for you is to apply for a car title loan. It will give you access to the needed financing very quickly, without a credit check and only against the title of your car, all while you keep driving it.

No matter what kind of a loan you apply for, it is important to know how much you will repay at the end. That’s why it’s important to understand loan terms and more specifically what kind of interest applies.

What is simple interest?

When you take a loan, you need to pay back the amount you have taken, or principal, plus the interest that accrues on it. The interest is typically expressed as a percentage of the loan amount and represents the cost for borrowing the money. In other words, the interest is what you pay to the lender for the service of providing you with the money. As it adds up to the amount you have to repay, it is of paramount importance to understand how interest works.

Basically, there are two types of interest that apply to a loan: simple and compound interest. Simple interest is calculated on the principal only and the balance that is left each month. Compound interest, on the other hand, is calculated on the principal plus the accumulated interest of the previous periods, meaning you pay interest on the interest.

In a nutshell, this means that simple interest loans are more advantageous for you and you should be looking for such loans when you are in need. The good news is that such loans exist and one of the most accessible ones is the car title loan.

How the interest on title loans is calculated

Now, you already know that the interest that will be charged on your car title loan will be simple interest. There are some other terms that you also need to be familiar with so that you can make the right calculations of the amount you are expected to return. There are two abbreviations to take into account:

  • APR or annual percentage rates. This is the total interest you are going to pay for an entire year. The calculations are very simple to do. You take the interest rate multiply it by the amount you have borrowed and you get the interest you will have to pay throughout the year. So, if your APR is 30% and the amount you have borrowed is $10,000, your yearly interest will be $3,000 (30% x $10,000);
  • MPR or monthly percentage rates. This is the monthly interest rate that applies to your loan. If you need to get the APR you simply need to multiply the MPR by 12.

Since the annual interest rate is usually quite high, most car title loan companies announce the monthly equivalent. Therefore, be very careful when you negotiate the interest rate and double check if it applies for a month or for a year in order to avoid any scams. Be advised that the APR for a car title loan is usually quite high since these loans are usually taken for shorter periods like a month or two.

You can also calculate the interest amount you are going to pay per day if you want. Take into account that each month is different based on the corresponding number of days. You need to divide the MPR by the number of the days in the month and then multiply the result by the amount you have borrowed. So, if you have 10% MPR and a month of 30 days your daily interest rate is 0.33%. if the amount of your loan is $5,000 then you have 0.33% x 5,000 and you end up with $16.50 interest per day.

How to make the best use of a car title loan

Knowing what kind of interest applies to your car title loan and the MPR or APR will help you calculate how much you “lose” every day and stimulate you to repay the debt as soon as possible. As you know, car title loans are usually used for emergency financing and are repaid over a short period of time. So, if you return the amount in 2 weeks, it is a very attractive type of loan. If you take your time, the amount that you will have to repay in interest alone will be much higher than the original sum of money you got. Here is what you need to do:

  • Turn your title loan into a short-term loan. Try to repay it as soon as possible. Usually, there is no repayment penalty for repaying the loan earlier than the period it was negotiated for, so do it if you can.
  • Try to negotiate the lowest interest rate possible. Even one point down on the monthly interest means a lot less money that you need to repay. Since the car title loan lender won’t be willing to lose you as a client to their competitors, they may be flexible with their terms.

Understanding how the simple interest on a car title loan is calculated will make it easier for you to pay it off on time and avoid additional charges or troubles. Besides, the car title loan remains one of the best options for getting much-needed cash in a short time, regardless of your credit history.

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