If you need a personal loan but are having trouble finding a low rate or qualifying, you may need to turn to secured loans. One option is to use your car as collateral for a loan. But before you sign up for this type of financing, consider the possible consequences.
Can I use my car as collateral for a loan?
In short, yes, it is possible to use your car as collateral for a loan. Secured loans require an asset that the lender can repossess if you default on the loan. doing so can help you qualify for a loan, especially if you have bad credit. By offering collateral, you take on more risk for the loan, so lenders may also offer lower rates in return.
However, to use an item you own as collateral for a secured loan, you must have equity in it. Equity is the difference between the value of the collateral and what you still owe on it. For example, if your car’s resale value is $6,000 but you still owe $2,500 on your car loan, you have $3,500 of equity in your vehicle. In this situation, you would have positive equity, because your car is worth more than what you owe on the loan.
The biggest risk of using your car as collateral is that if you default on the loan, your bank or lender may take possession of your vehicle to help pay off some or all of your debt. fees may also apply.
If you’re curious about using your car as collateral, check your lender’s terms to find out if they allow this type of collateral and how much equity you’ll need.
benefits of using a car as collateral
There are two main advantages to securing a loan on your vehicle.
- easier to qualify for a loan. Because of the additional security lenders get from your vehicle as collateral, the loans are often much easier to qualify for than traditional personal loans.
- lower rates. Secured loans generally have lower interest rates available.
disadvantages of using a car as collateral
Although using your car as collateral may be a good option for some, there are risks associated with this type of financing.
- it is more likely to be the other way around. There’s an added chance that you could go inside out, or have negative equity, because you’re adding more to the amount you already owe.
- possibility of recovery. This is a big risk that comes with using your vehicle as collateral. If you default on your loan, the lender can repossess your car. Along with this, your credit score will be negatively affected.
what other collateral can you use for loans?
Your car isn’t the only type of collateral you can use for loans. other types of collateral include:
- your home. home equity loans and home equity lines of credit (heloc) use a percentage of the equity you have built up in your property as the loan amount or line of credit. Banks generally allow qualified borrowers to use up to 85 percent of their home equity.
- your savings account. Stock-secured loans or passbook loans are types of personal loans that use your savings account as collateral. These are most often offered by banks and credit unions.
- your car title. A car title loan, also known as a “pink card loan” or “pawn title,” uses your car as primary collateral for the loan. it is a high-risk loan, as it generally has terms for a very short period, usually 15 to 30 days, and charges extremely high interest rates. Due to expensive fees and interest rates, this loan option can go downhill very quickly if you can’t pay off the debt in the short term.
the end result
Before you use your car as collateral for a loan, check out your other options. Do you have a trusted family member who is willing and able to offer a short-term loan? Do you have enough time to save for the expense or find additional income to cover it?
If a loan that uses your car as collateral is your best option, shop around with a handful of lenders. Compare payment terms, interest rates, and associated fees to find the loan that’s best for you.