A personal loan, falling under the umbrella of installment loans, is a popular choice for many people when they need extra cash. Data released by TransUnion shows that personal loan debt hit $225 billion in the first quarter of 2023, a 26% increase year-over-year.1
If you have a car you want to use as security for a loan, you may be curious whether it is possible to use it as collateral for traditional personal loans. However, not all lenders will allow for it.
When searching for personal loans with a car as collateral, you will likely come across title loans. Although these loans may seem like the right fit, they should be avoided if possible. Continue reading to learn more about personal loan options involving cars, car loans, and title loans.
Is a Personal Loan With Collateral the Right Option for Me?
The first question you should ask yourself about one of these loans is whether a secured loan option is right for you. Secured loans use collateral, while unsecured loans do not.
There are a few reasons why you may want to have a secured loan over an unsecured loan option:
- Secured loans offer easier eligibility for borrowers with poor credit history and scores.
- Potentially larger loan amounts.
Unsecured loans have some advantages over secured loans:
- The interest rates for unsecured personal loans will usually be higher than secured personal loans, especially if you have good credit.
- There is no risk of losing your asset (in this car, your car) with an unsecured loan.
- The application process is usually faster.
Where Can I Find a Personal Loan That Uses a Car as Collateral?
As mentioned above, an equity loan with a car is a variation of a personal loan that uses the fair market value of your vehicle to make funds available—which loan amounts will be based on. And so, that means that you must have some sort of equity in your car if you want to borrow this way. However, this does not always mean you have to own the vehicle outright; be mindful of negative equity, as it can mean losing money. With these loans, you can likely continue using your car as you repay your loan.
When looking for personal loans that use a car as collateral, you will likely need to turn to online lenders, as lenders who offer auto equity loans at financial institutions like credit unions and banks are few and far between. You can search for auto equity loans or secured personal loans online. Or you can find a specific lender you want to work with and ask whether they offer the funding you want.
What Are The Basic Requirements?
Because your car plays such an essential part in the loan process, lenders will look at a few details and have some requirements. Here are some things to be mindful of before applying for one of these secured loan options:
- They will ask about how much equity you have in the car and information if you have an existing loan on the vehicle (for example, they may ask about how many loan payments you have left)
- They will ask for the car’s title.
- Lenders will likely ask about the car’s make, model, condition, and mileage to get a rough estimate of what the car is worth. Your vehicle will have to be worth at least the loan amount you are asking for.
- You may have to send photos of your car so they can inspect it.
- Lenders will ask that your vehicle is in working condition and is road-safe.
- You may be required to have specific insurance coverage while you repay your auto equity loan.
What Can I Use the Funds for With a Secured Personal Loan?
With a secured personal loan such as an auto equity loan, you can use the funds for all kinds of expenses; here are some examples of how you can use one of these loans:
| Expense Category | Description |
| Medical Bills | Costs related to healthcare and medical treatments. |
| Home Repairs or Home Renovations | Expenses for fixing or upgrading your home. |
| Debt Payoff or Debt Consolidation | Payments to reduce or consolidate existing debts. |
| Pet Care | Costs associated with caring for your pets. |
| Wedding Expenses | Expenditures related to planning and hosting a wedding. |
| Monthly Bills (Rent/Mortgage, Groceries) | Regular payments for housing and food expenses. |
What About Using a Car Loan to Borrow Money?
An auto loan helps finance a car purchase and is one of the most popular ways that most people purchase a new or used car. When researching auto equity loans, you will also come across car loans. However, if you need extra cash, a car loan will not work; all those loans do is help you pay for a vehicle, and the funds cannot be allocated to any other use.
How Does a Car Title Loan Work?
Another loan option in which you can use your car as collateral for a loan is a car title loan—one type of the various bad credit loans out there. A car title loan makes a small to moderate loan amount available for borrowers with various credit histories. Sometimes, with car title loan options, there may not even be a credit check.
Instead, for car title loan approval, lenders will look at the value you have in your vehicle, your income, and your ability to repay the loan. Once you get through final approval for car title loans, you’ll get your loan funds and, in most cases, be able to drive your car while you make monthly payments on your car title loan.
Should You Avoid Car Title Loans?
Although the speed and convenience of car title loans may make it seem like they are a good choice for funding, they should be avoided for a few reasons. A recurring variable you will see with car title loans is a high annual percentage rate (or APR) on the loan’s interest. Sometimes, it is as high as 300% of the loan (depending on state laws).
Along with that, car title loan options tend to have a lot of fees with them. That high-interest rate and multiple fees make it extremely difficult to repay a car title loan. Many people lose their vehicles, and hurt their credit scores. And so car title loan options should be avoided whenever possible. And auto equity loans are a much better alternative to car title loan choices.
Getting an Unsecured Personal Loan Even With Bad Credit and Low Income
Although unsecured personal loans may not seem attainable with bad credit and low income, there may be options. Bad credit personal loans are available for borrowers with no credit history or rough credit; you just have to find the right lenders. There are many online lenders that you may be able to turn to if you need an unsecured loan with poor credit.
Before you take out one of these loans, pay attention to the interest rates, whether it is a short-term loan or a long-term loan option, the repayment fees, the loan term, the loan amount, and the lender.
Improving Your Credit Score
Regardless of what kind of loan you are looking to borrow money from, improving your credit score will help broaden your options, and when you do choose a loan, you will get lower interest rates and repayment terms. Here are some ways to improve your credit scores:
Make Your Payments on Time
One of the best ways to improve your credit score is to make your bill payments on time. Even a single late payment will hurt your scores and remain on your credit reports for up to seven years.
Keep Your Credit Utilization Low
Your credit utilization measures the debt you have against your available credit. Having your percentage over 30% will hurt your score; anything under that will be helpful.
Pay Off as Much Debt as Possible
Having a high debt ratio to your income will also hurt your credit score. And so, try and avoid unnecessary debt and pay off as much as you can.
Have a Good Credit Mix
Your credit mix looks at the diversity you have in your credit accounts. Having a good combination of different loan types will look good to lenders. While having a high amount of debt from a single type of credit account will be harmful.
Avoid Multiple Hard Credit Checks
Giving a lender permission to conduct a hard credit check will bring down your credit score by a few points. Multiple credit checks in a short period will really hurt your credit score, so you should try and avoid them if possible. Another thing you should be thinking about is creating a savings account so you don’t have to worry about taking on too much debt. You can start small by allocating money from each paycheck, or you can look into saving-focused budgeting strategies if you really want to dive in.
FAQS About Using a Car as Collateral—Secured Personal Loans
While both loan types use your car as collateral, auto equity loans typically come from formal financial institutions and may have better terms. Car title loans are often from specialized lenders, might not require a credit check, but often have high-interest rates and fees.
Approval times vary by lender. Some online lenders may offer quick approval within 24 hours for fast cash, while traditional banks or credit unions might take a few days to review your application—underwriting process times will vary.
If you default on your loan, the lender has the right to repossess your car. It’s crucial to understand the terms of your loan agreement and ensure timely repayments to avoid this scenario.
Yes, in some cases, borrowers can refinance these secured loans to get a lower interest rate or extend the loan term, making monthly payments more manageable. However, this depends on the lender and current financial conditions.
Generally, leased vehicles don’t have equity since they’re not owned by the lessee. However, there might be some equity if you have a buyout option, and there’s a difference between the car’s current market value and the buyout price.
Thoughts From CreditNinja
CreditNinja wants you to understand that before taking out a loan that uses your car as collateral, it is essential that you pay close attention to the repayment terms and monthly payment. This way, you can rest assured that you can repay your loan.
References:
1. The Personal Loan Industry Is Booming — Here’s Why | Money
