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Secured loans might be your best option if you need a personal loan but are having problems qualifying or locating one at a reasonable rate. One option is to use your car as collateral. You are able to borrow money against the value of your car with both auto equity loans and car title loans.
Although a secured loan can result in a lower interest rate, weigh the possible repercussions before accepting this kind of funding.
Getting an auto equity loan with your car as collateral
You can use your car as collateral for a loan. Secured loans need collateral that the lender may take back if you are unable to make loan payments. Having collateral can help you get approved for a loan, especially if your credit isn’t the best. Lenders may offer lower rates in exchange for secured loans because they carry greater risk for borrowers.
To use a possession as collateral for a secured loan, you have to have equity in it. Equity is the amount that remains after deducting your outstanding debt from the value of the collateral.
For instance, you have $3,500 of equity in your car if its resale value is $6,000 and you still owe $2,500 on your auto loan. Given that your car is worth more than you owe on it, you would have positive equity in this scenario. Your interest rate will probably be lower the more equity you have in the loan.
The largest risk of using your car as collateral for an auto equity loan is that your bank or lender may seize your car in order to collect the outstanding balance. Fees might also apply.
If you’re interested in this kind of secured loan, see if your lender accepts this kind of collateral and, if so, what percentage of equity you’ll need by reading the terms.
Benefits of using a car as collateral
Using your car to secure a loan has two main benefits.
- Easier to qualify for a loan. Secured loans are generally far easier to qualify for than conventional personal loans because of the additional security that lenders receive from collateral.
- Lower rates. Secured loans typically have lower interest rates available.
Drawbacks of using a car as collateral
While it may seem like a good idea to use your car as collateral, there are dangers involved with this kind of financing.
- More likely to become upside down. Because you are increasing your debt, there is an increased chance that you could end up upside down, or have negative equity.
- Potential for repossession. This is a significant risk associated with using your car as collateral. Your car may be repossessed by the lender if you don’t make loan payments. Along with this, your credit score will be negatively impacted.
Using your car as collateral for a car title loan
Your car is used as the primary collateral for a car title loan, sometimes referred to as a “pink-slip loan” or a “title pawn.”
Vehicle title loans enable you to borrow between 25 and 50 percent of the vehicle’s value in return for providing the lender with the title to your vehicle as collateral.
Because the loan period is usually very short, 15 to 30 days, and the interest rates are very high, sometimes reaching 300 percent annual percentage rate (APR), car title loans are high-stakes loans.
There are some ways in which these loans are not the same as auto equity loans.
- When it comes to loans, auto equity loans typically have longer repayment terms than car title loans, which have shorter terms.
- Compared to auto equity loans, car title loans are frequently far more expensive.
- Generally speaking, they permit borrowers to take out smaller loans than auto equity loans.
- Usually, if you have debt associated with your car, you are not eligible to get a car title loan.
If you are unable to pay back the debt within a short period of time, car title loans can rapidly spiral out of control due to the exorbitant fees and interest rates.
What other collateral can you use for loans?
There are other forms of collateral you can use for loans besides your car. Other types of collateral include:
- Your home. A portion of the equity you’ve built up in your property is used as the loan amount or line of credit for home equity loans and home equity lines of credit (HELOC). Banks typically allow eligible borrowers to access up to 85% of their equity in their homes.
- Your savings account. Personal loans secured by your savings account are known as share-secured loans or passbook loans. Banks and credit unions most often offer these.
Before putting your car up as collateral for a loan, make sure you’ve exhausted all other options. Do you have enough time to save up the cost or find additional income to cover it, or do you have a trusted friend or relative who is willing and able to offer you a short-term loan?
Check with a few lenders to see if your best option is a loan secured by your car. Examine interest rates, terms of repayment, and related costs to determine which loan is the best fit.
FAQ
Can I borrow money against a car I own?
Your car is used as the primary collateral for a car title loan, sometimes referred to as a “pink-slip loan” or a “title pawn.” Title loans for cars allow you to borrow between 25 and 50 percent of the vehicle’s value in return for giving the lender the title to your car as collateral.
Can you borrow equity from your car?
As long as your car has equity, you can use the money for anything. You can borrow money against the value of your car with auto equity loans. You may be able to borrow against $15,000 of your equity if your car is worth $25,000 and your loan balance is $10,000.
How do I get positive equity in my car?
You have positive equity and can use that money to pay for your new car if the value of your current vehicle exceeds your debt. You will have to settle any outstanding balances with the dealer if your car is worth less than what you currently owe. Additionally, you can trade in a leased vehicle before the term of your lease expires.
What does it mean to borrow against your car?
Similar to a home equity loan, an auto equity loan is obtained by using the value of your car rather than your house, and it is then repaid with interest. Auto equity loans carry risk, just like any other secured loan: the lender has the right to seize your vehicle if you default on the loan.
Read More :
https://www.bankrate.com/loans/auto-loans/can-i-use-my-car-as-collateral-for-a-loan/