Loans With Cars as Collateral: Everything You Need to Know

Taking out a loan with your car as collateral can seem like a quick and easy way to get cash, but it comes with risks In this comprehensive guide, we’ll explain how these loans work, the pros and cons, and alternatives to consider.

What Are Car Collateral Loans?

Also known as auto equity loans or auto title loans, car collateral loans allow you to borrow money against the value of your vehicle. Your car’s title acts as the collateral, which means the lender can repossess your car if you default on the loan.

There are two main types of car collateral loans:

• Auto Equity Loans – You borrow against the equity or cash value in your vehicle. Your car doesn’t need to be fully paid off.

• Auto Title Loans – You borrow against the full value of your car, so your vehicle must be fully paid off. Title loans tend to be for smaller amounts and shorter terms.

The amount you can borrow depends on factors like your car’s value, its equity, and your credit score. Auto equity loans generally offer 25% to 125% of your car’s equity, while title loans may offer 25% to 50% of your car’s full value.

Pros of Car Collateral Loans

Here are some potential benefits of borrowing against your car:

• Fast access to cash – You may be able to get funds in as little as one business day. This makes car collateral loans useful for covering emergency expenses.

• Lower rates – Secured loans often have lower interest rates than unsecured options like personal loans or credit cards. Rates on an auto equity loan could be under 10%.

• Easier to qualify – Lenders mainly look at your car’s value rather than your credit score. If you have bad credit, these loans may be one of few options.

Cons of Car Collateral Loans

However, there are also downsides to keep in mind:

• Risk of repossession – Your car can be repossessed if you fall behind on payments. This damages your credit and leaves you without transportation.

• Very high rates on title loans – While auto equity loans have lower rates, title loan rates typically reach 100% to 300% APR.

• Short terms on title loans – Title loans may only give you 1 or 2 months to repay. This can trap borrowers in cycles of debt.

• More debt – Taking on another loan adds financial stress. Make sure you can afford the payments.

• Insurance requirements – Most lenders require you to have full coverage insurance on the car.

Overall, auto equity loans tend to be less risky than auto title loans. But there are safer lending options that won’t put your vehicle in jeopardy.

Who Should Consider a Car Collateral Loan?

These high-cost loans should not be taken out lightly. A car collateral loan may make sense if:

• You have an emergency expense and need cash immediately
• You have significant equity built up in your car
• Your credit is too poor to qualify for an unsecured personal loan
• You can afford the loan payments without financial hardship

For many, the risks outweigh the benefits. Think carefully before putting your vehicle on the line.

Alternatives to Car Collateral Loans

Here are some options to consider before pledging your car as collateral:

• Personal loans – Even with bad credit, some lenders offer personal loans with APRs under 36%. Shop around to see if you qualify.

• Credit cards – Balance transfer or low-APR credit cards can provide funds at a lower cost than car title loans.

• Payment plans – For medical bills or other expenses, ask if a payment plan is available rather than taking a loan.

• Borrow from family/friends – Turn to your support system before putting your car at risk. Offer to sign a contract if needed.

• Sell or trade your car – You can sell your car privately or trade it in to eliminate your auto loan and get cash.

• Auto refinancing – Refinancing your car loan could lower your payment, freeing up cash each month.

Exhaust all other options before resorting to car collateral loans. And if you do take one out, have a solid repayment plan in place. Prioritize paying off the loan as fast as possible to minimize interest and avoid repossession.

How to Get a Car Collateral Loan

If you’ve weighed the pros and cons and decide a car collateral loan is your best choice, here are the basic steps:

1. Determine your car’s value using Kelley Blue Book or another valuation tool. Calculate your vehicle’s equity if you have an existing loan.

2. Check your credit score so you know where you stand. Many lenders require a minimum score.

3. Research lenders like credit unions, banks, and online lenders. Compare interest rates and loan terms.

4. Start the application process and submit required documents like proof of income, driver’s license, car title, and insurance.

5. Get loan approval and finalize paperwork. The lender places a lien on your title during this process.

6. Receive your loan funds via direct deposit, usually within one business day if approved.

Be sure to carefully review all loan terms before signing anything. Avoid lenders that pressure you or charge very high fees.

The Bottom Line

Car collateral loans allow you to tap into your car’s value to get quick cash, but they aren’t without risk. Auto title loans in particular can trap borrowers in cycles of debt with triple-digit interest rates.

Exhaust all other options before pursuing a car equity loan, car title loan, or any loan with your vehicle as collateral. But if your credit doesn’t qualify you for alternatives, an auto equity loan from a reputable lender could serve as a last resort in an emergency situation.