In the dynamic world of finance, the car title loan industry has emerged as a significant growth sector, particularly during and post the COVID-19 pandemic. Referred to as "pink slip loans" in the US and "title loans" in the UK, these loans enable borrowers to use their vehicles as collateral to secure a loan. In Spain, this industry is relatively nascent, offering a unique window of opportunity for foreign companies to penetrate and establish a robust presence in this burgeoning market.
Understanding car title loans
Car title loans are usually short-term loan products that allow borrowers to secure a loan using their vehicle as collateral. The borrower hands over the title of their fully paid-for vehicle to the lender and receives a loan amount typically ranging from 50% to 90% of the vehicle's value. In Spain, these loans are marketed as "préstamo por tu coche", with which means 'loan for your car'.
The business model is similar to that of a pawnshop, but in this case, instead of depositing the vehicle, the borrower continues to use their vehicle in exchange for a rental fee. This rental fee is in most cases how the lender makes money, allowing them to lend money without charging interest, thus avoiding the controversy of being classified as a usury activity.
The Spanish market: A land of opportunity
The Spanish market for car title loans is ripe for expansion. Currently, there are aproximately 20 small actors in the market, with no strong leader in the vertical. This lack of dominant players presents a significant opportunity for foreign companies looking to bring their expertise to the Spanish market.
The process for obtaining a car title loan in Spain is straightforward and mostly takes place online, requiring only a phone call and a WhatsApp conversation with the lender. The requirements are similar to those in the US, with the vehicle needing to be fully paid for, insured, and with all road taxes paid.
Why Spain is an attractive market
Spain's economic landscape, coupled with the tightening of borrowing requirements by traditional lending institutions, has led to an increased demand for alternative lending solutions. This surge in demand has created a fertile ground for the growth of the car title loan industry.
Moreover, the Spanish car title loan market is currently fragmented, with no dominant leader. This presents an exciting opportunity for new entrants to carve out a significant market share and establish themselves as a go-to solution for those in need of alternative lending options.
For a long time, unsecured payday lending was the product of choice in the lending market in Spain. However, with half of the players disappearing from the market in the last four years, it's evident that lending in Spain carries inherent risks due to specific cultural factors. A notable aspect of Spanish culture is the "picaresca nacional" – a term referring to the pride in exploiting system loopholes. Many lenders have failed to adequately address this cultural nuance, which represents a significant challenge in the industry.
With over a decade of hands-on expertise in strategic compliance guidance, iBerotech leverages regulatory technology and partnerships to empower financial services firms in skillfully navigating Spain's intricate regulatory environment for competitive advantage.
Deep-dive into the Spanish car title loan market
In Spain, car title loans are generally marketed as a temporary solution to an acute need for cash, not as a long-term solution, although these loans aren't limited to a specific term. In principle, the customer can decide how long he needs the loan for, and negotiate the payment term accordingly. This term can be modified during the life of the loan, including its early repayment, which most of the times will involve a small fee.
Interestingly, while there are close to twenty lenders in Spain, the majority are concentrated in the Mediterranean region. Only a handful operate in Madrid, and a solitary provider exists in Barcelona, even though they profess to serve the entire Spanish territory.
Title loan process: A step-by-step guide
Navigating the car title loan process in Spain is straightforward. Here's how it works:
1. Ownership: The vehicle must be fully paid for and owned outright by the applicant.
2. Insurance and legal requirements: The vehicle must be insured, and all ITV (Technical Inspection of Vehicles) and road tax payments must be up-to-date.
3. Vehicle age: The vehicle shouldn't be more than 10 to 15 years old. However, exceptions are made for upper-end brands, which can be older.
4. Loan principal: The loan amount can range from 50% to 90% of the vehicle's value, as determined by GANVAM's valuation in Spain.
5. Loan offer: Companies commonly offer the highest possible loan amount to customers. The loan is typically interest-free to avoid being classified as a usury loan. However, some lenders may display a reasonable interest rate (APR) on their website, but additional hidden costs may apply.
6. Car rental: The car owner must rent the car for a monthly fee until the loan is fully repaid, which is compulsory with most of the lenders.
7. Contractual documentation: The owner signs three online documents: a seller & buyer contract, a mandate, and a rental contract.
8. Vehicle inspection: In most of the cases, the vehicle is inspected either via a video call or at a partner garage. Some lenders skip a physical inspection.
9. GPS installation: Upon successful valuation and contract signing, a GPS may be installed in the vehicle by a third party, usually the insurance company. This allows some companies to remotely shut off the vehicle if payments are not made on time. However, this is not the norm, and it should be noted that most of the lenders do not follow this practice.
10. Application process: The application process is all handled online, it requires the applicant's ID, vehicle photos, basic vehicle documents (insurance, road tax, ITV), proof of address, a phone number, and a debit card where to transfer the funds.
11. Additional service costs: Some companies may charge additional costs for due diligence, garage inspection, paperwork handling, etc.
12. Repayment: When it comes to repayment, all surveyed lenders in Spain require a monthly bank transfer for the agreed amount to the lender's bank account. Interestingly, none of the lenders mentioned the use of direct bank debit or bank card charges as collection method. This lack of automation in the collection process is indicative of the overall level of automation within the industry, suggesting there's room for technological advancement and process optimisation.
13. Payment modification: The customer can modify their payment amount and loan term, with a minimum amount to cover the agreed monthly car rental, of course.
14 Pre-payment: There are usually no pre-payment penalty charges if the loan is paid in advance. However, a small fee of around 1% or 2% might be charged.
15. Loan term: The loan term can vary from a few days to a few years, depending on the lender and the conditions under agreement.
As an example, a loan of 6.000 EUR at 0% APR, to be repaid in two years, with a monthly car rent amount of 600 EUR, would result in a total cost to the client of 14.400 EUR.
This product is designed to provide a viable alternative for those in need of financial assistance, particularly in a market where traditional lending options may not be readily available.
Conclusion
The car title loan industry in Spain presents a unique opportunity for foreign financial services operators looking to expand their operations, while taking over a market that is lacking a dominant player.
At iBerotech, we have over 12 years of experience working with financial services organizations while navigating the challenges of the Spain market, successfully launching business operations in the Spanish fintech ecosystem.
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