Editor’s note: This article was first published in September 2013 and describes Spain’s quick-loan market during the economic crisis. Spain has since tightened its consumer-credit and usury rules, so the situation may have changed.
Microloans for small amounts of money, quick cash using your car as collateral, or loans secured only by your home even if you are on a debtors’ blacklist.
These businesses are booming, with many companies and even private individuals making a killing out of the needs of millions of people gripped by financial desperation.
They can’t be called a con or a scam, since it’s true that no one is holding a gun to anyone’s chest to make them sign the terms. But sometimes desperation, and the lack of understandable explanations, mean that many people who were on the brink of ruin risk ending up beyond ruin, losing the little they had left. Here are a few things you should know before answering any of those many ads saying “Get the money you need in 24 hours with only…”.
1. Quick money with your car as the only collateral
At first it sounds good. We can get a loan with our car as the only guarantee, and most of these companies also let us keep using the car while we pay. This way of getting money is probably the worst way to sell a car for less than it’s worth, because a large majority end up losing it. How does this business really work?
The truth is that if you lack ethics, this would be a good idea for entrepreneurs with savings, since it is one of the most profitable businesses and one of the lowest-risk for the business owner. To begin with, the maximum amount you’ll be lent is a percentage of the vehicle’s appraised value. This means the company values the car at the price it could sell it for tomorrow without any effort. Assuming your car is valued at €2,000, you’ll get a loan of roughly €1,200 or €1,000.
To get the money, you sign a sale-and-buy-back contract. In other words, you have already signed papers saying the car is no longer yours (you’ve sold it), although the sale only takes effect if you miss a repayment. With high-end vehicles the business is even more profitable, to the point that most of these companies are praying you’ll miss a payment so they can keep the car.
Repayment periods tend to be short and suffocating, with high interest, and so that you can keep using the vehicle, they make you sign a rental agreement. That is, they have rented you your own car.
Tip: before turning to “quick cash against your car” ads, sell the car properly, at a fair price.
2. Microloans
To begin with, the interest any bank charges on a small personal loan is already close to usury. Add to that hundreds of companies offering €300 or €600 in 24 hours, and few people realise that the interest can be around 2,000%, plus huge charges if you miss the repayment deadline, which for small amounts (€300 and €600) is usually 30 to 90 days.
This microloan system is exactly the same one the mafia used for decades: someone borrowed a small sum, paid abusive interest and ended up losing everything that could be taken from them. Today it is legal and done by legitimate companies that spring up in the crisis, because that is where there are truly desperate people who don’t realise that if they don’t have €300 today, they almost certainly won’t have €600 in 30 or 60 days. A very high percentage miss their payments, but these companies know that sooner or later they will pay, with the corresponding added charges, so they are making an investment that is very profitable in the short term and even more profitable in the long term.
3. Money with your home as collateral
In this case, you are given money with your house as the guarantee. The amounts of this kind of loan can be higher, even if you have no payslip and are on every debtors’ blacklist, as long as your home is free of charges or has only a small mortgage on it. They will only look at the value of your home, because that is what they really want.
Crisis equals opportunity, and here we have presented three of the most profitable business ideas, the ones that have created the most millionaires during a recession, though at the expense of other people’s misfortune. The good thing about this type of company (for its owners) is that they invest on a sure thing: in the worst case for them, you make your payments on time and in full, and their investment returns at least 30%. In the best case, you don’t pay and they keep your house at a bargain price, or your car, which they will sell the next day for at least 40 or 60 per cent more than the money they gave you.
That’s how these companies work, and those are the dangers you face as an individual who turns to these loans, microloans, quick cash and so on, where very often a person goes into a bad situation desperate and comes out of the experience even worse off.
Featured image: Albert Bridge, CC BY-SA 2.0, via Wikimedia Commons.
