Can I Use My Car As Collateral For a Loan?
When you feel cash-strapped and need urgent money, a personal loan might let you borrow the desired amount. In fact, it is more affordable than using a credit card. Using collateral to reduce this loan’s interest even more during a monetary emergency can be a better option.
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Yes, it’s possible to use your vehicle as collateral when you wish to get a loan sanctioned. Secured loans require an asset that the lender could seize if you fail to repay the loan. However, doing so might assist you in qualifying for a loan, mainly if you have poor credit.
Hence, you can think of more perils for the loan by building collateral; lenders might also offer nominal rates in exchange. But there are a few drawbacks to collateralizing your car for a loan. So, as you’re inquisitive about using it as collateral, this article has valuable information for you. Let’s get started.
The Value of a Car as a Collateral in Loan Approval
Car title loans are mainly termed “secured loans” as they’re secured by a particular asset, such as a car. However, various benefits are there to secured loans, which are the following:
1. High Amount
You can receive a higher amount as a loan. It’s due to the fact that the lender is sure about getting his money back through installments or by selling the collateral.
2. Low Interest
Lenders might provide lower charges for secured loans. If you can find a suitable lender from a suitable loan service provider website, you can reap all the benefits of these loans.
What Are the Downsides of Providing Your Car as Collateral?
Although it could be a top-notch option for some, there are several risks with this type of financing:
1. Chance of vehicle confiscation
You are using your car as a guarantee. So, there surely is a risk of losing your vehicle in case you fail to pay the loan amount. As per the law, the lender can repossess your vehicle if you find yourself in a financial conundrum. So, it’s one of the most significant risks of using the car as collateral.
2. It could be more likely to be upside down
There is a possibility that you could be upside down or have adverse equity. This is because you’re adding more to the amount you already own.
Different types of loans that allow Your Car as Collateral
There are different types of loans available from direct lenders while using your vehicle as collateral:
1. Car title loan
It’s one type of secured loan, using your vehicle as collateral. However, as per the FTC, you usually need to have a car that is debt-free in order to get a car title loan. The online lenders will let you borrow 25-50% of the vehicle’s value. The tenure is 15-30 days for such a case.
People might want to go for car title loans upon the arrival of a need for instant cash. for example, to cover an unforeseen bill. No doubt, it’s a pricey option. Due to the short terms and high fees of title loans, according to the FTC, these title loans have a monthly finance charge of around 25% on average, i.e., an APR of approximately 300%.
2. Personal loan
It’s one type of credit you can use for virtually any purpose. For example, you can utilize a personal loan to repay other higher-interest debts or make a significant purchase. They usually have lower interest charges than credit cards.
Personal loans needing collateral are more secure. Because they are about fetching almost equal value for value, they are also called auto equity loans. To borrow from a lender, your vehicle, e.g., car, must have no ongoing debt.
3. Cashback auto refinance
This loan can be taken on your ongoing car loan when you are in need of extra cash. Taking this cashback or top-up will increase your debt in relation to your car again. However, in return, you get the needed money instantly.
Remember that an auto-refinancing loan accumulates the debt you have and might extend your payment schedule to a longer duration.
The different types of collateral to use for loans
Apart from using your car as collateral, other collateral types are the following:
- Your savings account
- Car title
Despite all the several benefits of using your car as collateral, such as fast cash, the hassle-free application process, and no-credit-check, it would be better for you to consider the terms and conditions beforehand. Title loans are the best option as they have flexible requirements, like loan approval if you have poor credit.