Key Takeaways
- A car title loan allows you to use your vehicle’s title as collateral to secure a short-term loan, typically without requiring a credit check. While you retain possession of your car during the loan term, failure to repay can lead to repossession.
- Interest rates for title loans are often high, and repayment periods are usually short, making them a costly borrowing option.
- Exploring alternative financing options, such as personal installment loans, may provide more favorable terms and lower risks compared to title loans.
If you’re asking, “Where can I get a loan using my car as collateral?”, several lenders provide this option. These title loans or secured personal loans let you borrow money by using your vehicle to secure the loan. While these types of loans offer quick access to cash, they often come with risks like high interest rates and potential repossession. Before applying, it’s crucial to understand how these loans work, where to find them, and safer alternatives to protect your finances. This guide will help you make an informed decision.
Pros and Cons of Using Your Car as Collateral for Loan
The first question you should ask yourself about one of these loans is whether a secured 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 may be faster.
Where to Get a Loan Using Your Vehicle 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 Qualification 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 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.
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:
- 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).
- These loans also often have hidden fees that can make loan repayment stressful and expensive.
- There is also the risk of losing your car should you miss a certain amount of payments or default on your loan.
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.
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 car title 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 payments. This way, you can rest assured that you can repay your loan.
References:
1. The Personal Loan Industry Is Booming — Here’s Why | Money
