Life can throw financial curveballs when you least expect it. From emergency home repairs to unexpected medical bills, having quick access to extra funds can be crucial. If your credit makes getting approved for a traditional personal loan difficult, using your car as collateral for a loan may be an option.
In this comprehensive guide, we’ll walk through everything you need to know about putting up your car as collateral to secure financing. I’ll explain what types of loans allow car collateral, their pros and cons, steps for getting approved, and tips for deciding if using your vehicle as loan security makes sense for your situation
What Does It Mean to Use Your Car as Collateral?
Let’s start with a quick overview of how collateral works. When you take out a secured loan, you pledge an asset you own to secure the debt. If you stop making payments on the loan the lender can seize the collateral to recoup their losses.
For auto collateral loans, your vehicle serves as the asset securing the debt. The lender places a lien on your car title during the loan term. If you default, they can repossess your car to cover the unpaid loan balance.
Your vehicle’s equity determines how much you can borrow against it. Equity is your car’s current market value minus any amount you still owe on auto loans. The higher the equity, the more money you can typically access via an auto collateral loan.
What Types of Loans Allow You to Use Your Car as Collateral?
There are a few different loans that allow using your car as security for the debt:
Auto Equity Loans
- Also called auto title loans or auto collateral loans
- Allow borrowing against car equity
- Fixed repayment terms, like 2-5 years
- Lower rates than unsecured loans
Car Title Loans
- Provide 25-50% of car value
- Very short terms, like 30 days
- Extremely high interest rates
- Higher risk of repossession
Pawn Loans
- Get a loan by temporarily pawning car title
- Also carry high rates
- Failure to repay means car gets sold
Auto equity loans are the least risky option since they come with manageable rates and terms. Title loans and pawns should only be considered as an absolute last resort.
The Pros of Using Your Car as Collateral
Putting up your car as collateral for a loan provides a few potential benefits:
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Better approval odds – The lender’s risk is lower when lending against collateral. This makes it easier to get approved, especially if you have poor credit or limited income.
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Higher loan amount – With good vehicle equity, you may be able to borrow more than with an unsecured personal loan. This provides access to more funds when you need them.
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Lower interest rate – Secured loans tend to have lower interest rates, saving you money over the loan repayment period compared to unsecured options.
The Cons of Using Your Car as Collateral
However, pledging your vehicle as loan collateral also comes with some serious drawbacks and risks:
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Potential repossession – If you default on the loan, the lender can seize your car. This leaves you without transportation.
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Fees for late/missed payments – Auto collateral loans impose fees if you make late payments, making the loan even more expensive.
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Loan flipping – Some predatory lenders push frequent loan refinancing with added fees each time to generate revenue. This traps borrowers in debt.
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** Aggressive collections** – Repossession may happen quickly once you default, and lenders can pursue deficiencies in court.
6 Steps for Using Your Car as Loan Collateral the Right Way
If you carefully follow key steps, you can minimize the risks that come with borrowing against your vehicle:
1. Check your vehicle’s value – Its market value sets the upper limit for your potential loan amount. Get an estimate from resources like Kelley Blue Book.
2. Review any existing auto loans – Your equity is the current value minus owed amounts. Subtract any existing car loans to determine available equity.
3. Shop multiple lenders – Compare loan offers from banks, credit unions, and online lenders. Look for the lowest rate and best overall value.
4. Read the fine print – Scrutinize the loan contract before signing. Make sure you understand all fees, the interest rate, and terms.
5. Consider a loan affordability budget – Factor the new payment into your regular monthly budget to confirm you can manage it.
6. Explore other funding options first – Only use your vehicle as a last resort if you have no other way to access emergency funds.
Alternatives to Auto Collateral Loans
Before deciding to use your car as collateral, explore some other funding options that could provide the money you need:
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Borrow from family or friends if possible. Even if informally, write up loan terms and repayment timeline.
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See if you qualify for credit cards with 0% intro APR offers. This delays interest for 12-15 months.
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Discuss custom payment plans with creditors like hospitals and utilities. Set terms you can afford.
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Ask your employer for an advance on your paycheck or to cash out paid time off you’ve accrued.
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Consider peer-to-peer lending sites like Prosper and LendingClub, which match individual investors and borrowers.
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Look into any home equity you may have via a HELOC or cash-out refinance if you’re a homeowner.
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Research local non-profit credit counseling agencies for low-interest financing programs.
Having a plan to access funds without leveraging your vehicle provides alternatives that reduce risk.
Ask Yourself These Questions Before Using Your Car as Loan Collateral
Carefully consider these key questions to determine if using your car as collateral for a loan makes sense:
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Do I absolutely need these funds or could I temporarily postpone or tighten my budget instead?
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Do I have any other assets like savings or home equity I could tap for a secured loan first?
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Will borrowing against my car jeopardize my ability to get to work and earn income?
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Am I comfortable with the loan terms and confident I can make the payments?
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Have I pursued all possible alternatives for accessing lower-risk financing?
Unless you can confidently answer these questions, an auto collateral loan is likely not your most prudent option. Prioritize exploring other financing sources.
Weighing the Pros and Cons
Using your vehicle as collateral for a loan provides fast access to funds but also comes with risks. You could obtain approval more easily and borrow more money than with unsecured loans. However, failing to repay the loan means forfeiting your car.
Carefully consider all your alternatives, understand the loan terms thoroughly, and have a concrete repayment plan before moving forward. This helps ensure you make the smartest financial decision for your situation.
With the right preparation, an auto collateral loan can serve as an emergency funding bridge without putting your transportation at undue risk. But pursue this option thoughtfully and strategically to avoid problems down the road.
Car Title Loans Have Very Short Terms
30-day terms are typical for these loans. Unfortunately, a month is often not enough time for most borrowers to position themselves financially. So, these loans are often rolled into another term resulting in more interest charges and other fees—by those who can’t pay them back after the term ends. The longer the loan is outstanding, the more borrowers spend on high interest for these loans. This cycle can be difficult to escape and can ultimately cost borrowers their vehicles—even after paying large amounts on the loan.
Bottom Line Up Front
- Car title loans are low-risk for lenders but have much higher risk for borrowers.
- High interest rates and short terms are common in car title loans.
- If you need fast cash, a personal loan might be a better, lower-risk alternative.
When you’re in need of cash, you might be tempted by late-night commercials offering quick cash with only your car as collateral. These loans are most commonly known as car title loans, but go by many names—pink-slip loan, title pledge or title pawn. Is this a smart option? Here is what you need to know.
Can I Get a Loan Using My Car As Collateral?
Can I use my car as collateral on a loan?
Using your car as collateral on a loan means if you default on a loan, the lender can seize your car to compensate for the financial loss. The catch to using your car as collateral is that it must have equity. Equity is the difference between what the car is worth and how much you owe on it.
Can I use my car as collateral for an auto equity loan?
The biggest risk of using your car as collateral for an auto equity loan is that if you default on the loan, your bank or lender can take possession of your vehicle to help repay your debt. Fees might also apply.
What is a collateralized car loan?
Collateralized loans, particularly vehicle collateral loans, offer a practical solution for individuals seeking financial assistance while leveraging the value of their cars. You must have equity in the vehicle to utilize your car as collateral for a secured loan.
What is a secured loan backed by a car?
Secured loans are a type of personal loan that is backed by collateral. Secured loans backed by a car are sometimes referred to as auto equity loans. Typically, lenders don’t require a certain minimum credit score to qualify for an auto equity loan, which is why it’s appealing to those who may not be eligible for an unsecured personal loan.