Secured Loans Using Your Vehicle as Collateral – A Complete Guide

Taking out a loan and using your vehicle as collateral can be an attractive option when you need access to funds. However, these types of secured loans also come with risks that you should fully understand before moving forward. This comprehensive guide will provide all the key details on secured auto loans so you can make an informed decision.

What is a Secured Auto Loan?

A secured auto loan is a loan that uses your vehicle as collateral for the loan. This means that your vehicle’s title is signed over to the lender until the loan is fully repaid. If you default on the loan, the lender can repossess and sell your vehicle to recoup their losses.

Secured auto loans are also sometimes called auto equity loans or auto title loans. They allow you to leverage the equity you have built up in your vehicle to obtain financing. Equity is the difference between what your vehicle is currently worth and what you still owe on your existing auto loan.

For example, if your car is worth $15,000 and you owe $5,000 on your current loan, you have $10,000 in equity. A lender may allow you to borrow up to or even exceeding this amount, using the value of your car as collateral.

The Pros and Cons of Secured Auto Loans

Like any financial product secured auto loans come with both advantages and disadvantages to consider.

Potential Advantages

• Lower interest rates – Secured loans often come with lower interest rates because the lender has your vehicle as collateral if you default. Rates may be 50% or less than an unsecured personal loan.

• Bigger loan amounts – You can potentially borrow more with a secured loan because it is based on your vehicle’s value rather than just your credit score and income.

• Easier to qualify – Lenders are more likely to approve borrowers with poor credit for a secured auto loan since the vehicle serves as collateral.

Potential Disadvantages

• Risk of repossession – If you fall behind on payments, the lender can seize your vehicle. This can severely disrupt your life and ability to get to work.

• Payments may be unaffordable – Just because you can borrow more doesn’t mean payments will be affordable based on your budget. Defaulting could result in repossession.

• Interest charges accrue – Interest charges keep accumulating daily This can result in you owing more than the original loan amount if it takes you a long time to repay

• Fees – Secured lenders often charge origination fees and other charges that can add to your total costs.

What are the Alternatives?

If you have concerns about the risks of putting up your vehicle as collateral, there are other options to get funding that may be preferable in some situations:

• Unsecured personal loans – Personal loans do not use any collateral, so your vehicle is not at risk. While rates are higher, amounts and terms are flexible. Good credit scores can result in lower rates.

• Credit cards – Many credit cards offer 0% intro APR periods, rewards, and revolving credit lines. Managing credit cards responsibly can help build your credit over time.

• Borrowing from family/friends – Turning to family or friends may offer low or no interest financing based on personal relationships. But make sure to treat informal loans professionally.

• 401(k) or retirement plan loans – You may be able to borrow against your own 401(k) balance and repay yourself over time with minimal impacts to your credit.

What Credit Score is Needed?

The minimum credit score requirements for a secured auto loan will vary by lender but tend to be lower than unsecured loan options since your vehicle serves as collateral. Here are some general credit score guidelines:

• Excellent credit (720+) – Will likely qualify for the lowest interest rates from most lenders, which may be below 10%.

• Good credit (680-719) – Still considered good credit but may see slightly higher rates of 10-15% with some lenders.

• Fair credit (640-679) – Your options narrow at this level but approval is still possible. Expect rates around 15-20%.

• Poor/Bad credit (below 640) – Qualifying will be most difficult but subprime lenders may offer approvals with high rates.

Keep in mind that income level and debt-to-income ratio will also factor in beyond just your credit score when applying.

How Much Can You Borrow?

The amount you can borrow with a secured auto loan will depend on how much equity you have built up in your vehicle. Many lenders will allow you to borrow up to 100% of your available equity.

For example:

• Vehicle value: $15,000
• Current loan balance: $5,000
• Available equity: $10,000

In this scenario, the lender may approve you for a secured loan up to $10,000. Some lenders may even approve loans exceeding your vehicle equity.

However, just because you can borrow a certain amount does not necessarily mean you should. Only borrow what you can reasonably afford to repay to avoid the risk of default and repossession.

What is a Typical Interest Rate?

Interest rates on secured auto loans can vary dramatically depending on your credit score and history. Here are some typical rate ranges:

• Excellent credit – As low as 2.99%, generally under 10%
• Good credit – Approximately 10-15%
• Fair credit – Around 15-20%
• Poor credit – Usually 20%+ but may be higher

The best way to find personalized rate quotes is to compare multiple secured auto loan lenders. Each lender will evaluate your application differently. Comparing quotes helps ensure you get the lowest rate possible.

What is a Typical Loan Term?

Secured auto loans may offer terms ranging from 12 months to as long as 72 months (6 years). Longer terms do mean lower monthly payments but also more interest paid over the life of the loan.

36-60 month terms are common, though a 36 month term is advisable when possible to limit interest charges. Carefully weigh the term length that works for your budget when evaluating loan offers.

Can You Get Approved with No Credit History?

It is generally quite difficult to get approved for a secured auto loan if you have no credit history at all. Most lenders want to review at least 12-24 months of credit history before extending a loan.

There are a few options if you have no credit history:

• Apply with a co-signer who has established credit
• Talk to smaller local banks and credit unions about their options
• Open a secured credit card and use it responsibly for 6-12 months to start building credit

Building at least some credit first will open up many more lending options beyond just secured auto loans. Having no credit at all is one of the biggest obstacles to loan approval.

Is Refinancing Possible?

Yes, you may be able to refinance an existing secured auto loan to improve the terms. Reasons to consider refinancing include:

• Lowering your interest rate
• Reducing your monthly payment
• Shortening your loan term
• Consolidating other debts into the loan

To qualify for refinancing, you will need to meet the lender’s credit score, income, and other eligibility requirements. Having substantial positive equity in your vehicle will also help ensure approval.

Compare refinance offers from multiple lenders to find the best rate and overall value. Closing an existing secured loan during a refinance will require paying it off in full.

What Happens if You Default?

Defaulting on a secured auto loan is extremely risky since it may result in repossession of your vehicle. Default occurs when you miss or only partially make your monthly payments.

Here is what typically happens after defaulting:

• The lender will contact you demanding payment and fees after the first missed payment.
• If nonpayment continues, the lender can activate the repossession process. This may only take 30 days of nonpayment.
• The lender will take possession of your car and sell it to recoup their losses on the defaulted loan.
• Any remaining loan balance not covered by the sale proceeds will become an unsecured debt you still owe.
• Your credit score will plummet due to the default status.

Losing your vehicle can severely impact your life by preventing you from getting to work or completing essential errands. Avoid default at all costs.

Tips for Success with a Secured Auto Loan

Here are some tips to make sure your experience with a secured auto loan goes smoothly:

• Only borrow what you can comfortably afford each month
• Try to get the shortest term possible to limit interest charges
• Have some savings available to cover emergencies if needed
• Sign up for automatic payments from your bank to avoid missed payments
• Pay more than the minimum when possible to pay off the balance faster
• Keep your vehicle properly insured against all losses
• Contact the lender immediately if you anticipate having trouble making a payment

Overall, secured loans using your vehicle as collateral allow fast access to credit but also come