Whenever you are burdened with an unforeseen financial difficulty and need urgent money, you can turn to your car for help. You can offer your car as collateral for a personal loan.
Using a car as collateral for a Personal loan can be an ideal solution if you are in need of quick cash. Secured loans like car title loans allow you to borrow funds against the value of your vehicle.
While it can be a lifesaver, one must still understand the terms and conditions involved in using a car as collateral for a personal loan and also read
Let’s understand the terms and conditions pertaining to using your car as collateral for obtaining a personal loan. Also, use Beem to check personalized rates and compare the best personal loan offers for your needs.
Is It Possible to Use a Car as Collateral for a Personal Loan?
You can use your car as collateral for a personal loan if your car has a considerable amount of equity. The worth of your car can be used as collateral to take out a loan.
However, multiple factors must be considered while applying for an auto equity loan, including the car’s make, model, mileage, state, and other previous loans.
In some instances, you can borrow up to 50 percent of the value of your car from the lender by using your car as collateral. Let’s say your car’s worth is $10000, but you have a debt of $3000. Depending on your credit history and lender, you can get a loan worth between $1500 and $3500.
What Does the Value of a Car Need to Be to Use It as Collateral for a Personal Loan?
Using a car as collateral for personal loans is only possible if they are equity-backed. This means that you will still owe the amount on the vehicle compared to its value.
Let’s say you own a car worth $12,000 with a loan of $1,000. You would have $11,000 equity in it. Case in point – when the car’s resale value is $12,000, and you owe $1,000 on the loan. The interest rate on your loan will be less if you have equity in your car rather than if you do not.
Benefits of using a car as collateral
Low interest rates and simpler requirements are among the advantages of using a car as collateral.
Interest Rates
If you acquire a loan with collateral, it will more likely be available at lower interest rates than loans you availed without collateral.
Per your creditworthiness and other lending criteria, acquired loans can be availed at an interest rate of as low as 3 percent. At the same time, a standard loan without collateral will have an interest rate of around 6 percent.
Personal Loan Requirements
You can also qualify for a personal loan more easily when you use a car as collateral. Securing a loan usually has easier requirements than taking out an unsecured one. Lenders take on less risk when you use your car as collateral.
Drawbacks of Using a Car as Collateral
While cars may seem like a great option to use as collateral for your personal loan, it also involves many risks and downsides. Here are the top two disadvantages of using your car as collateral for a personal loan:-
Upside-Down Personal Loan
A car pledged as collateral for a personal loan runs the risk of creating an upside-down loan in case you have negative equity in your car and an upside-down loan. This means that you will owe more than the car is worth. This kind of equation can turn your loan upside down if you take out the loan and add it to your existing debt.
Get Your Car Repossessed
You might lose your car if you fail to pay the loan. Another downside of this is that you will lose your credit score along with losing your car.
Also Read: What can be used as collateral for a personal loan
Factors To Consider Before Using Your Car as Loan Collateral
It is essential to weigh several key factors, such as your ability to repay the loan and insurance requirements, before using your car as collateral. Make sure your financial decisions align with your circumstances.
Capacity to pay back the loan
Evaluate your capability to pay back the loan. There is the threat of losing your car if you fail to pay. Consider your earnings, expenditures, and financial liabilities before deciding on anything. To ensure you can repay the loan timely, you should form a strategy before you get a loan.
Insurance obligations
You may need collision and comprehensive coverage to borrow money from certain lenders. If you don’t have it already, you will need to add this coverage, which could raise your premium.
Loan terms
You need to ensure that the loan agreement outlines all the terms clearly. This includes fees, interest rates, repayment tenure, late fines, penalties for missing a payment, etc. If you feel the loan terms and conditions should be more thorough or lack transparency, it’s time to look for another lender.
A wrong decision can significantly impact your budget, finances, and everyday life, especially if you use a car as collateral. Ensure that you consider all aspects and the worst-case scenarios to evaluate the risk before taking a loan.
Also read: Land as Collateral for a Personal Loan
Alternatives To Using Your Car as Loan Collateral
Using your car as collateral for a loan is one of many options. Collateral can also take the form of:
Your Home
There are two different ways to procure this loan: home equity loans and home equity lines of credit (HELOCs). You can also get a line of credit using the equity you hold in your property. Usually, a bank loan will let you borrow if you qualify to hold 85 percent of the equity in your home.
Your savings account
Loans secured by your savings account are called share-secured loans or passbook loans. In most cases, such loans are available at banks and credit unions.
Savings
You can also use savings accounts as collateral for acquiring personal loans. Passbook loans and share-secured loans use your savings account as collateral for personal loans.
Assets
Personal loans can also be secured by other assets, such as a home, jewelry, fine art, boat, or antiques, in addition to your car.
Life Insurance Policies
If you ever bought an insurance policy, use it as collateral for your loan. However, if you default on the loan, your lender will be allowed to collect money on the policy’s cash value, and you will lose your life insurance policy and the premiums invested in it.
Auto Equity Loans vs. Car Title Loans
| Feature | Auto Equity Loan | Car Title Loan |
|---|---|---|
| Eligibility | Requires car equity (car value > remaining loan balance) | Requires car ownership (no outstanding loans/liens) |
| Loan Amount | Based on car value | Based on percentage of car value |
| Interest Rates | Lower | Higher |
| Repayment Terms | Longer | Shorter |
Conclusion
Using a car as collateral for a personal loan can be helpful if you need quick money. If you fail to repay the loan, your lender will take the collateral as restitution. Both auto equity loans and car title loans help you borrow money against your car’s value.
You can also opt for a secured loan as it contains a lower interest rate. However, evaluate all potential consequences of taking the loan before finalizing the details with your lenders.
You can also use Beem to check personalized rates on multiple personal loan options that work with your financial health.
