Using a Car as Security for a Personal Loan | Bankrate

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If you need more money and have a car with a lot of equity, you can use the car as collateral for a new loan. The annual percentage rate is usually lower than unsecured loan options.

If you have bad credit, it may be a better option than your unsecured loan. Lenders may be willing to take a risk on bad credit lenders knowing they have your car as collateral.

The most common types of security are auto equity and car title loans. Both allow you to borrow money based on a percentage of your car’s value. Understanding how these loans work can help you decide if your car loan is worth it.

The pros and cons of using a car as collateral for a personal loan

When you offer your car as collateral for a loan, you take some of the focus off your financial situation. Lenders are more concerned about how much they can sell your car for if you default on the loan. However, there are some specific issues with your car loan that you should be aware of before applying.

Benefits

• It’s easy to qualify. You’ll have a better shot at getting approved even if you have bad credit since the lender can repossess your car if you can’t make your loan payments.
• Low fees. Lenders base their rates on how much you can repay your loan and how much they can get back if you do. Since they can recoup their losses by repossessing your car, you’ll often get a lower rate for using it as collateral.
• Quick approvals. Some auto equity and auto lenders don’t require your credit score to qualify, which can lead to cash on the same day you apply.

Bad

• The car can be repossessed. If your car is your only source of transportation, losing it can ruin your life. Your credit will be severely damaged if you show that your car was repossessed.
• Higher rates than other auto refinance loans. You’ll pay a higher APR than a typical car refinance loan because you’re increasing the amount secured by your car.
• The vehicle must meet the lenders requirements. Not all vehicles are eligible for financing due to factors ranging from age and location to overall condition.
• Yyou can end up with bad balance. The quality of cars goes down over time, and the more money you have, the more likely you are to end up stranded. That means your car will be lower than your credit rating, which makes it harder to sell or buy a new car.

Types of loans with your car as collateral

Auto equity and car loans are two types of bad credit that require your car to be used as collateral. They are often considered good options for emergency loans because of their quick funding times. Each has different approval requirements and payment terms that you should consider before choosing one or the other.

Car title loans

A car title loan is also known as a “pink slip” loan or “title pawn” loan. With this type of loan, you get a loan secured by the title of your car. The lender has a percentage of your car right up until you pay off the loan.

Loan amounts are usually small and are only made with free and clear vehicles. You can usually borrow between 25 and 50 percent of the value of your car. Interest rates are usually very high, and most require you to pay off the balance within 15 to 30 days.

Auto equity loans

The main difference between auto equity loans and car title loans is that you can borrow money even if you still owe money on your current car loan. Your loan is based on the difference between what you owe and what your car is worth, known as your equity.

Another important advantage of car loans over car loans is that they usually have lower interest rates and longer terms. However, it may not be easy to find a lender that offers these loans because not many banks or car finance companies do.

Auto equity loan vs car title loan: Which is better?

If you are not sure which type of loan to choose, compare their features side by side.

An auto equity loan makes sense if:	A car title loan makes sense if:
– You still owe money on your current car loan – You want lower rates with better conditions – You have enough equity to qualify	– Your car is free and clear – You only need a small loan – You can repay the loan in 15 to 30 days

What other collateral can you use for loans?

If your vehicle does not meet the requirements for a car loan or car title loan, consider other safe loan options.

• Home equity loans and home equity lines of credit (HELOC). These loans allow you to convert a percentage of the equity you have built up in your home into a loan amount. Most banks allow you to borrow the difference between what you owe and 85 percent of the value of your home.
• Co-secured loans or passport loans. If you have a large deposit in your local bank, you may be able to get a loan secured by part of your savings.
• 401k loan. If you have enough balance in your retirement account, you may be able to borrow against its value with a 401(k) loan.
• Business loan. You may be able to take out a business loan that is secured by property, equipment or the land and building where you run your business.

Important point

Borrowing against your car should be a last resort. Before using your car as collateral for a loan, see if a trusted friend or relative is willing to help you. Check your budget to see if you can save money and pay cash instead of taking out a loan.

If a loan is the best option – or the only one, shop rates and deals with a few lenders. Take the extra time to compare each lender’s interest rate, payment terms and fees to find the best deal.