As a potential short-term borrower, you can pledge your car as collateral. Often, you will go for the car title loan when you need quick cash to settle a bill, manage debt or attend to an emergency.
Knowing your annual percentage rate (APR) is the first step in determining whether a car title loan is right for you. This is particularly important since different financial institutions will offer you different rates on the car loan.
A car loan’s APR refers to the cost you will be paying on the borrowed money every year. The figure often expressed as a percentage includes the interest rate on the car loan and additional fees. Notably, the car title loan is not usually borrowed for a whole year. Still, the APR is calculated annually.
While the federal government, under the Truth in Lending Act, makes it paramount for the lender to inform you as the consumer of the APR before you sign the loan agreement, you might still want to calculate it yourself.
To do that, you will need to know the loan amount. The latter is the total amount you hope to get for your vehicle. This will typically be the cost of your car. Additionally, you will need to determine the loan term, which is the length you intend on taking out the auto loan. Finally, you will need to ask your lender what their loan’s interest rate would be and what additional fees you would incur, including the origination fees.
After collecting all the information mentioned above, you will then need to calculate your estimated monthly payments.
To calculate the monthly estimated payment, you will need a spreadsheet. On it, you will enter the following formula into one cell.
=PMT (interest rate expressed in decimal/12, number of months in the loan term, loan amount, with additional fees)
Using the spreadsheet and the figures you had collected from your preferred financier, you should be able to get your estimated monthly payments. Chances are, you will get a negative figure when you use the formula. This should not throw you off, as the number will still come in handy when calculating the estimated APR.
For the estimated APR, you will require the following formula entered into a cell in your spreadsheet.
=RATE (number of months in loan terms, monthly estimated payments, value of loans minus any additional fees) *12
Note that to calculate the estimated APR, you have to have already calculated the monthly payments and have the complete breakdown of all additional fees. The negative figure from the monthly estimated payments formula should be entered as-is.
When you are pressed for cash that you need for an emergency or to settle your bills, you might be tempted to overlook the APR your car title loan attracts. In hindsight, this would be detrimental as different lenders usually offer different rates.
Still, the Federal Reserve has managed to put a cap on just how much APR a car title loan should attract. Specifically, as of August 2020, all commercial institutions can only charge an average APR of 4.98% on car title loans of a duration ranging from 48 to 60 months. Still, financial institutions can play around with this figure depending on various factors.
These additional factors that might affect your APR on the car title loan include:
As with any other financing, most financial institutions will consider your credit score before extending a car title loan to you. As it pertains to a car title loan, the better your credit score, the lower the APR will be. Specifically, they will often offer you a rate closer to the recommended 4.98%, which should significantly reduce your expected monthly payments.
As mentioned above, how much you borrow depends on the cost of your vehicle. The latter will also affect just how much APR is charged on the loan that you take out.
If you take out a loan amount that is significantly less than the value of your vehicles, you should get a sizably lower rate. This will often apply if you have made a sizable down payment or if you have a car that has a significant trade-in value.
Note that the decision to give you a lower APR rate when you take out a lower loan is informed by the idea that you present a lesser risk to the lender or financial institution in the event that you default on the loan amount.
As with the other types of loans offered by financial institutions, a car title loan’s duration determines the APR you are charged.
A longer-term on your car title loan is often between 72 to 84 months. As a borrower, you might want to go with this long-term because it significantly reduces your monthly estimated payments. Unfortunately, these longer loan terms will also mean that the APR you are expected to pay will be substantially higher. Altogether, you end up paying higher interests for longer loan terms.
Chances are, when you are facing a short-term financial crisis, a car title loan might sound like a viable source of short-term funds. When you apply for the said car title loan, the financial institution will often embark on a prequalification check to ascertain if you are a viable borrower. As a borrower, it would be prudent to also embark on a prequalification test yourself to check if the car title loan terms are favorable. This should involve calculating the APR and comparing this to the interest rates and fees from different lenders. Concisely, before signing on the dotted line to take out a car title loan, it is paramount that you first know the APR you will be incurring. Browse through our blog to familiarize yourself with the different title loans available to you. We would also love to hear from you. Contact us today and let us help you process any car loan facilities you might want to take out.