Car title loans can be expensive, especially those with higher interest rates and longer terms. Rushing in to the first available loan without paying attention to the specific terms can result in a loan that is very difficult to repay.
In some cases a loan can cost five, six or even more times the amount borrowed. In these cases borrowers often look for alternatives to make the loan more reasonable and affordable.
One of the main alternatives is refinancing the title loan. So how do we know if this is worth the time and effort? We need to figure out what we might be able to save by moving forward with this option.
Factors for Analyzing Refinancing a Title Loan
To determine whether or not it is worth it to refinance a title loan we need to look at several factors:
- The original cost of the loan
- Length of time left on the loan
- Potential savings from refinancing
If it turns out that the potential savings of refinancing is significant, then considering a title loan refinance may be a good idea. Let’s look at some of the details.
Original Title Loan Costs
The first thing we need to look at are the costs of the original title loan. If the interest rate and total cost of the loan is low then refinancing may not be worth it. If the interest rate and the total loan cost is high, then a title loan refinance may save a significant amount of money.
Length left on Original Loan
The next thing we need to look at is the length left on the current loan. If there are only a few payments left then the process of applying for and refinancing the loan may not be worth it. On the other hand, if there are many payments left, especially at a high interest rate, then refinancing may be well worth it.
Potential Savings
As stated the main purpose for moving forward with a title loan buyout or refinance is to save money.
To better illustrate the decision process let’s take a look at a few examples.
Examples of Loan Amounts and Length
To figure out if refinancing an existing title loan is worth it lets take a look at some examples of loan amounts and lengths to see how much we could potentially save.
Title Loan Example 1 – $2,000 Loan at 20% per Month
The first example is a $2,000 title loan with a rate of 20% per month. 20% per month is 240% APR. If the monthly rate and APR seem confusing, learn more about the differences between the monthly rate and APR. There are a large number of possibilities depending on the original loan length and the number of payments left.
To turn this into an answer to the question about whether or not refinancing is worth it we need to decide how much is enough to warrant considering refinancing.
In this case we are going to make the assumption that if the remaining payments on the existing loan exceed the original loan amount, in this case $2,000, then refinancing is worth considering. Using this assumption we get the following cases:
| Original Loan Length | Payments Left | Monthly Payment | Amount Left | Consider Refinance? |
|---|---|---|---|---|
| 12 | 5 | $450.53 | $2,252 | Yes |
| 24 | 10 | $405.10 | $4,051 | Yes |
| 36 | 20 | $400.57 | $8,011 | Yes |
| 12 | 1 | $450.53 | $450 | No |
| 24 | 2 | $405.10 | $810 | No |
| 36 | 3 | $400.57 | $1,202 | Maybe |
As we can see from the table above the loan with 5, 10, and 20 payments left will result in an amount higher than the original loan amount. The 20 payments left on the 36 month loan equals a staggering $8,011. This is after making payments for over a year.
Amortizing a high interest loan for a long period is never a good idea. In these cases it is always a good idea to consider refinancing the title loan. No one wants to repay four or five times what they borrowed. t
Next let’s take a look at a larger loan with a lower rate.
Title Loan Example 2 – $5,000 Loan at 12% per Month
The next example is a $5,000 title loan at a rate of 12% per month or 144% APR. There are a large number of possibilities depending on the original loan length and the number of payments left. We’ll use the same numbers from the previous example to provide enough of an illustration.
We’ll also use the same assumption that if the interest payments on the existing loan exceed the original loan amount, in this case $5,000, then refinancing is worth considering. Using this assumption we get the following cases:
| Original Loan Length | Payments Left | Payment Amount | Amount Left | Consider Refinance? |
|---|---|---|---|---|
| 12 | 5 | $807.18 | $4036 | Maybe |
| 24 | 10 | $642.32 | $6,423 | Yes |
| 36 | 20 | $610.32 | $12,206 | Yes |
| 12 | 1 | $807.18 | $807.18 | No |
| 24 | 2 | $642.32 | $1,284 | No |
| 36 | 3 | $610.32 | $1,831 | No |
These two examples provide an overview of when it makes sense to consider refinancing and when it may not be worth it. To figure out this for a specific situation simply take the loan amount, number of payments left, interest rate, and perform the analysis to determine how much you have left to pay in interest on the existing title loan.
It is worth noting that we see the same trend with the longer loan with 20 payments left. It equals another $12,000 after making payments for over a year on a $5,000 loan.
Summary
Refinancing a title loan may be a way to get better terms on an existing title loan and ultimately save a significant amount of money. We provided several examples – use the same process shown to evaluate whether or not refinancing a title loan is worth it for you. The goal of a title loan refinance is to reduce the overall cost. If you are stuck in a high interest loan with less then favorable terms then consider a title loan refinance to reduce your costs.