# Navigating Compound Interest and Title Loans: Unveiling the Risks of TitleMax

Categories: Economics

Economics is a complex field of study, and it is riddled with ambiguous concepts that can have significant financial consequences. In this paper, we will explore two such notions that are crucial to understand when it comes to taking out loans: compound interest and title loans. These terms are intertwined within the realm of money lending, and without proper knowledge of their implications, individuals risk losing a substantial amount of money. Compound interest is the process by which interest accumulates over the repayment period of a loan (NCSU, 2009).

When agreeing to a compound interest model, individuals run the risk of paying a staggering 250% more than the actual value of the loan. The interest rates are compounded and added up to form the highest interest rate at the final payment (Teacherschoice, 2009). It is true that title loan companies do not conduct credit checks, which is one reason why the interest rates associated with these loans tend to be higher than those of conventional loans.

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Title loan companies can complete lending operations in as little as 15 minutes, and Title Max is one such company specializing in title loans that employ the compound interest model. The essence of the compound interest model can be summarized by the following formula: A = P (1 + i)n. In this equation, A represents the total amount owed by the borrower, P denotes the principal amount borrowed without any interest, i signifies the interest rate established for the loan per compounding period, and n indicates the number of payments made for the loan, ultimately determining the compound interest rate.

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Let's consider an example using Title Max. According to Complaints Board (2009), a loan of \$1050 resulted in a borrower paying over 121.56% in interest, leaving them owing over \$2000 to the company with just two months remaining on the loan (Complaints Board, 2009). By applying the formula mentioned above, we can calculate the actual interest rate per period for this specific loan and determine the sum of the compound interest. Formula we can calculate the interest rate per period for the loan. Assuming a loan period of 12 months, the actual interest rate per period is approximately 0.103. Consequently, we can calculate the total amount paid for the loan using the formula A = P (1 + i) n. Therefore, A = 1050 (1 + 0.103)12 = 1050 x 2.215 = 2326. Based on this calculation, we can see that the compound interest rate for the title loan from Title Max amounts to 121.56%, which the borrower had to repay to the company. In other words, borrowing \$1050 from Title Max would require a repayment of \$2326 (Title Max, 2009). The growth of interest rates can be visualized by comparing simple and compound interest rates in the following graph (Graph 1), where P represents the principal sum borrowed, Y indicates the loan term in years, the curve S reflects the progression of simple interest, and the curve C demonstrates the development of compound interest. Please note that the analysis and calculations presented here are for illustrative purposes only and do not constitute financial advice. It is crucial to thoroughly understand the terms and conditions of any loan agreement and carefully consider the implications before making borrowing decisions.

Updated: Jun 23, 2023