Prepayment Penalties for Car Title Loans

A car title loan is a loan that is secured when the car’s title is used as collateral that usually comes with hefty prepayment penalties if the buyer is unaware. These title loans are typically shorter-term loans with much higher interest rates. Because they have such higher interest rates, the lender may include the provision of a prepayment penalty in the conditions of the loan. A prepayment penalty is a lender-imposed fee charged to the borrower if the borrower pays off the loan early. This penalty is meant to protect the lender against a loss of income that would have been guaranteed from the interest on the loan. The lender will be most interested in making as much of a profit off of your loan as possible, and by paying the loan off early, a borrower is essentially causing a loss in the profit the lender will earn over the term of the loan.

A Car Title Loan Scenario

Let us say you need to borrow $5,000. So, you find a lender who is willing to provide a car title loan. After verifying your income, and that there are no outstanding liens on your car, the lender loans you $5,000. At a 30% interest rate, over a term of 36 months, the actual amount that the borrower will repay to the lender is in fact $7,641.28. What that means is that the lender has made a profit of $2,641.28 from the interest imposed on the loan. Under these conditions, for the term of 36 months, a monthly payment of $212.26 is repaid to the lender by the borrower. However, what would happen if the borrower decided to pay off the loan early? Let us say that this specific loan has no prepayment penalty imposed on it. And, after 18 months — having made 18 payments of $212.26 — the official payoff amount for the remainder of the principal is $3,046.53.  Were the borrower to have the means to pay the remainder of the loan off at this time, the lender would actually be losing $774.05 from the interest they would have gleaned from the remaining months of the loans term.

Imposition of Prepayment Penalties

Had this loan a prepayment penalty imposed on it, the lender would not have a loss of that $774.05. Prepayment penalties allow the lender to make the greatest profit possible under early payoff conditions. Many prepayment penalties will charge a percentage of the remaining amount to be paid in addition to that remaining amount. Given the high interest rates on title loans, and the amount of profit the lender stands to lose from early payoff, it is more than likely that a borrower will face a considerable penalty for repaying the loan early. Even if that penalty were only 10% of the remaining balance, the borrower will be paying the $3,046.53 payoff amount as well as a penalty of $304.65. However, if the lender includes a condition that, regardless of when the loan is paid off during its term, all calculated interest be paid by the borrower, then the lender will not lose any anticipated profit whatsoever. Therefore, it is critical that you understand the terms of your loan agreement beforehand, so as to minimize your own losses.

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