If you need a personal loan but cannot find one with a low interest rate or are not getting approved, you may need to consider secured loans. You can get this by using your car to back up the loan.
Some loans, like auto equity loans and car title loans, can let you borrow money based on how much your car is worth. A secured loan usually has interest rates. This means you can pay less in the long run.
However, before you take out this type of loan, you should consider the risks, like losing your car if you cannot pay back the money. This article covers how and where you can get a loan using your car as collateral.
How to Obtain an Auto Equity Loan Using Your Car as Collateral
When you want to use your car as collateral for a secured loan, you promise to give the lender something valuable (in this situation, your car) if you cannot repay the loan. Using collateral can help you get approved for a loan, especially if you do not have good credit. Since you are putting something valuable at risk, the lender might reward you with a lower interest rate.
You need to have equity in it to use something as collateral, like your car. Equity is the difference between the car’s worth and the amount you still owe. For example, if your vehicle is worth $6,000 and you still owe $2,500 on your car loan, then you have $3,500 in equity.
If your car is worth more than you owe, it is called positive equity. The more positive equity you have, the better your chances of getting a lower interest rate on the loan. The biggest risk of using your car for an auto equity loan is that the lender can take your vehicle to cover the debt if you don’t repay the loan.
You might also have to pay extra fees. If you are interested in this type of loan, you should check with your lender to see if they allow it and how much equity they require.
Advantages of Using Your Car as Collateral for a Loan
Using your car as collateral for a loan has two significant benefits, which are:
- Easy Loan Qualification: Using your car as collateral will make it easier for your loan to get approved. Since the lender can take your car if you do not pay it back, they will feel more secure and more likely to give you the loan.
- Lower Interest Rate: Because your loan is backed by your car, the lender does not have to charge you as much interest rate, so you end up paying less overall.
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Disadvantages of Using Your Car as Collateral for a Loan
When you use your car as collateral for a personal loan, there are some risks you should know about.
- Negative Equity: This occurs when you end up owing more on the loan than the car is worth. This is called being “upside down” or having “negative equity.” This can happen if you borrow more money than you already owe on the car.
- Repossession: Another disadvantage is that the lender can take your car away if you cannot repay your loan. This is called repossession. If this happens, it can give you bad credit or hurt your credit score, making it harder for you to borrow money in the future.
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Is a Car Title Loan the Same as an Auto Equity Loan?
A car title loan is a type of loan where you use your car as collateral. This means the lender will hold onto the ownership document of your car until you pay the loan. It is sometimes called a “pink slip loan” or “title pawn.”
With this type of loan, you can borrow between 25% to 50% of your car’s worth. However, the loan is risky because you must repay it quickly. In most cases, you must pay back within 15 to 30 days.
The interest rates are also very high, sometimes at 300% annually. Car title loans are different from auto loans in the following ways:
- Car title loans are short-term, while auto equity loans usually give you more time to pay back.
- Car title loans are often much more expensive than auto equity loans.
- You can borrow smaller amounts with a car title loan than an auto-equity loan.
- If you still owe money on your car, you cannot take out a car title loan.
Where Can You Get a Loan Using Your Car as Collateral?
You can get a secured loan using your car as collateral from places like car title loan companies, a few banks, and credit unions. Car title loan companies specialize in car loans. They will hold on to the title or ownership of your car until you pay back the money.
Some online lenders can let you use your car as collateral for a loan. Some car title loan companies have websites where you can apply for a loan. However, you must be careful with online loans because many have high interest rates and short-term payment periods.
Some online lenders also offer auto equity loans, a safer option with lower fees and more time to pay back. The few local banks and credit unions that offer this type of loan usually have more reasonable terms and offer lower interest rates than car title loan companies.
Ultimately, the best loans using your car as collateral are the types that offer lower interest rates and enough time to pay back.