When banks talk about interest rates, they look at the interest rate over the span of a year. As auto title loans are meant to be paid back in a matter of weeks or sometimes months, this APR can be tricky to understand. Here’s how auto title loan rates are calculated.
The Title Loan Fee
When you take out a title loan, you’re charged a fee for every $100 you borrow. For example, if you pay $20 for every $100 borrowed and borrow $600, you’re paying a total of $120 in fees. This breaks down to a title loan interest rate of 20%. ($120 divided by $600.)
Getting to the APR
The Missouri Division of Finance breaks this down in an easy formula. To get the APR, you divide the fee you’re charged by the amount you need to borrow. ($120 divided by $600) and then divide it by the number of days before you need to pay it off (using 14 days in this example). Multiply that by 365 days in the year and then by 100 to move the decimal to the correct place.
$120 divided by $600, divided by 14, times 365, times 100 = 521.43 percent.
The annual percentage rate (APR) is much higher and comes out at over 500%. What is important to remember is that it is unlikely you’ll even have to worry about the APR, unless you don’t pay the loan on time and keep rolling it into a new loan. Even then, many states have laws limiting the number of times you can roll a title loan into a new title loan. It's very rare that you will have the loan long enough to worry about what the APR is.<