Car Title Loan Business 101: A car title loan is a high-interest, one month loan on a vehicle using the owner’s title as collateral. (Note: refer to your state/province for specifics.) Most title loan lenders require the vehicle to be absent any outstanding loans; a “free and clear title.”
Unlike a pawn loan, the beauty of a title loan is that the owner seeking the title loan still has possession of their vehicle. However, if the owner fails to make timely payments, the title lender will repossess the collateral. Best practices dictate that, after all repossession fees, auction costs, re-marketing costs, etc. are deducted from the sales price, any surplus is refunded to the consumer.
Typically, title loan borrowers pay 10% or more per month in interest! As an example, a $2500 car title loan at 10% interest/month would cost the borrower $250 per month. A 3 month loan would total $750 in interest to the lender. And, at the end of this 3 month example, the car title loan borrower would still owe the lender $2500!
It’s common practice for the lender to require, not only the monthly interest payment be paid, but that the principal be reduced by 10% or more each month as well. So, a $2500 loan at 10% per month plus a 10% reduction in the loan principal would require the borrower to pay $500 to the lender at the end of month one.
The pros for a lender are obvious. Let’s assume a California car title loan lender has been in the business 18 months and has $150,000 on the street. Average loan balance is $2501; that’s 60 total loans on the books. Not too hard to accomplish! $150,000 at 10%/month ( a very low interest rate for the industry)= $15,000 gross revenue. Assume the average title loan is 5 months in length. One employee at $8 to $12/hour plus a spiff, a 300 to 600 sq. ft. footprint, loan management software, 2% – 3% default rate, phone, utilities, advertising, annual licensing and audits, blah, blah, blah… and it’s easy to envision an owner netting $10,000/month before taxes with just one location.
One common misconception held by prospective new title lenders is that they need a storage yard, repo men, special insurance… WRONG! There are bonded, licensed repossession companies and auctions that make it easy for the lender to do nothing more than make a phone call or log in to a website to have a borrower’s vehicle picked-up, refurbished, delivered to the auction and a check mailed to the lender all sight unseen!
The cons for the borrower? Loss of their vehicle that probably has a low book value 2X the amount loaned on their collateral.
Want to know more details about car title lending? We’re car title lenders and consultants. Start here: “How to Start a Car Title Loan Business Course.”