Personal Loans with Your Car as Collateral: A Complete Guide

Taking out a personal loan can be a great way to get access to funds for major expenses or consolidating debt But if you have bad or limited credit, you may struggle to qualify for a decent interest rate from traditional lenders. That’s where collateral loans come in – they allow you to put up an asset like your car as security for the loan This opens up financing options and can result in better terms compared to unsecured loans.

In this comprehensive guide, we’ll explain everything you need to know about using your car as collateral for a personal loan

What Are Collateral Loans?

Collateral loans are a type of secured loan, which means they are backed by some kind of asset you pledge as security for the debt. The asset – often called “collateral” – guarantees the lender will get repaid even if you default on the loan.

With a car title loan, you put up your vehicle title as collateral. The lender places a lien on the title, meaning they have a legal right to repossess your car if you fail to repay the loan.

An auto equity loan is similar, except you’re borrowing against the equity or current cash value of the vehicle instead of the title. Equity is determined by taking the car’s market value and subtracting any loan balances owed on it.

For example

• Your car’s current market value is $15,000
• You owe $5,000 still on your auto loan
• So you have $10,000 in equity ($15,000 – $5,000)

With an auto equity loan, you can borrow up to 100% of your car’s equity.

Benefits of Using Your Car as Collateral

Putting up collateral like your vehicle offers a few key advantages:

• Fast approval: Secured loans allow for quicker approval compared to unsecured personal loans. The lender feels more confident lending to you since your car guarantees repayment.

• Better rates and terms: Collateral loans will generally have lower interest rates and more flexible repayment options than unsecured alternatives. With good credit, you may even find rates comparable to auto financing.

• Borrow larger amounts: The more equity you have, the more you’re able to borrow. Those with lower incomes or credit scores can access larger loan amounts this way.

• Build credit: Making on-time payments can help improve your credit score over time.

Risks and Drawbacks

Using your vehicle as collateral does come with some notable downsides:

• Risk of repossession: If you default on the loan, the lender can seize your car. This leaves you without transportation, so it’s critical to only borrow what you can realistically afford to repay.

• Paying interest: Interest charges mean you’ll end up paying back more than you originally borrowed. And if you have bad credit, interest rates can be quite high.

• Loan fees: Lenders may charge origination fees or early repayment penalties. This increases the total cost of the loan.

• Equity requirements: You must have sufficient equity in your vehicle to qualify. Older cars with high mileage often don’t have enough equity.

What Types of Cars Can Be Used as Collateral?

You typically need a car that’s less than 10 years old with under 100,000 miles to have equity available. The vehicle should also be free of any major mechanical issues.

Here are examples of cars that tend to work well:

• Recent model year sedans – e.g. Toyota Camry, Honda Accord
• Mid-size SUVs – e.g. Ford Explorer, Jeep Grand Cherokee
• Pickup trucks – e.g. Ford F-150, Chevrolet Silverado

Exotic cars and classic vehicles may not be accepted by some lenders. You’ll also need to have the title in your name – leased cars won’t qualify as collateral.

How Much Can You Borrow Against Your Car?

The maximum loan amount will depend on:

• The current market value of your car
• Any remaining auto loan balances
• Your income and credit score

Most lenders cap the loan amount at 50-60% of the car’s resale value. With a $15,000 vehicle and auto loan balance of $5,000, you might qualify for around a $5,000 – $7,500 collateral loan.

Those with excellent credit could potentially borrow up to 100% of the car’s value. But it’s generally not recommended to max out your available equity.

What Are Interest Rates and Terms Like?

Interest rates on collateral loans typically range from 8% to 36%. With good credit (scores over 660), you’ll likely get rates around 8% – 15%. Those with lower scores can expect rates in the 20% – 36% range.

Loan terms are often 24-36 months, but can go up to 72 months for some borrowers. The longer the term, the lower your monthly payment will be. But you’ll pay more interest over the life of the loan.

Be sure to shop around and compare offers from multiple lenders. Even a 1% difference in rates can save hundreds over the loan repayment period.

How Long Does the Application Process Take?

One of the appeals of collateral loans is they can be originated much faster than other financing options. Here’s a general timeline:

• 15 minutes – Complete an online application providing personal details, income, employment, and car info.

• 15 minutes – Initial loan decision. If approved, an underwriter will verify details and value your car.

• 24 hours – Receive final loan offer if you qualify.

• 24 hours – Finalize paperwork and have funds deposited into your account.

So you could have access to funds in as little as 2-3 days after starting an application. Just make sure to have required documents ready like proof of income and car title.

What Happens if You Default on the Loan?

Defaulting occurs when you fail to make monthly payments as required by the loan agreement. If you default, the lender has the right to repossess your car and sell it to recoup their losses.

You’ll have some time to become current on payments again before the repossession process starts:

• 1 month late – The lender will contact you and charge late fees.

• 2 months late – If unpaid, the lender issues a repossession warning.

• 3+ months late – Your car can now be involuntarily repossessed if payments remain unpaid.

Having your vehicle repossessed makes it extremely difficult to find affordable transportation. It’s crucial to factor the monthly payments into your budget and avoid default at all costs.

Who Should Consider a Car Collateral Loan?

This type of financing is best suited for borrowers who:

• Have equity available in their vehicle

• Have limited credit history or low credit scores

• Need a larger loan amount

• Want loan proceeds quickly

• Can afford the monthly payments

• Accept the repossession risks if unable to repay

If you have great credit, you may find better rates with a traditional unsecured personal loan. But for those that struggle to qualify for financing, collateral loans can provide essential access to funds.

What Are Some Alternatives?

If using your car as collateral doesn’t seem right for your situation, here are a few other options to consider:

• Unsecured personal loans – No collateral needed, but will require good credit for approval.

• Credit cards – Easy to get approved but have high variable interest rates.

• Payday loans – Must be repaid quickly; very expensive fees.

• Home equity loans – Borrow against home equity instead of your car.

• Borrowing from family/friends – Avoid interest fees but can risk relationships.

• Peer-to-peer lending – Borrow from individual investors. Offers more flexible approval.

• Auto loan refinancing – May free up car equity by lowering your existing auto loan rate.

5 Tips for Getting a Car Collateral Loan

If you decide this type of financing does fit your needs, here are some tips for getting approved:

1. Shop around – Compare loan offers from credit unions, online lenders, and banks. Even small rate differences can save you hundreds.

2. Check your credit – Good credit scores (over 660) qualify for the lowest rates. Review your credit reports beforehand and dispute any errors.

3. Provide proof of income – Paystubs, tax returns, and bank statements allow lenders to verify your income. Higher income means bigger loan amounts.

4. Gather vehicle documentation – Have the car title, registration, owner’s card, and insurance information available.

5. Don’t borrow more than you need – It can be tempting to max out your available equity, but only take what you can comfortably afford to repay on time.

The Bottom Line

Personal loans with your car as collateral allow borrowers to access funds they might not otherwise qualify for. Just be cautious – only borrow what you can reliably budget for each month. Defaulting could put your vehicle at risk of repossession