If you need a personal loan but can’t find a low-interest or qualifying loan, you may need to turn to a secured loan. One option is to use your car as collateral for the loan. However, before you decide on this type of financing, you should consider the possible consequences.
Can I use my car as a mortgage?
In short, yes, it is possible to use your car as collateral for a loan. A secured loan requires an asset that the lender can recover if you fail to repay the loan. This can help you qualify for a loan, especially if you have poor credit. By providing collateral, you take on higher loan risk, so lenders may also offer lower interest rates.
However, in order to use an item you own as collateral for a secured loan, you must own the asset. Equity is the difference between the value of a security and the amount you still owe it. For example, if your car has a resale value of $6,000, but you still owe a $2,500 auto loan, your vehicle has $3,500 in equity. In this case, you will have positive equity because your car is worth more than the loan you owe.
The biggest risk of using your car as collateral is that if you default on your loan, your bank or lender may take your vehicle to pay off some or all of the debt you owe. Fees may also apply.
If you want to use your car as collateral, check your lender’s terms and conditions to see if such collateral is allowed and how much equity you’ll need.
Benefits of using a car as collateral
There are two main advantages to getting a loan with your vehicle.
- Easier to qualify for a loan. Loans are often easier to qualify than traditional personal loans because the lender takes extra security from your vehicle as collateral.
- Lower interest rates. Secured loans usually have lower rates available.
Disadvantages of using a car as collateral
While using your car as collateral may be a good option for some, there are risks to this method of financing.
- It’s more likely to be upside down. By continuing to increase the amount you already owe, you are more likely to be reversed or negatively equity.
- Redemption potential. This is the main risk that comes with using your vehicle as collateral. If you default on your loan, the lender can repossess your car. At the same time, your credit rating can be negatively affected.
What other collateral can you use to make a loan?
Your car isn’t the only type of collateral you can use for a loan. Other types of collateral are:
- Your house. Home equity loans and home equity lines of credit (HELOC) use a percentage of the equity you accumulate in your home as a loan amount or line of credit. Banks typically allow qualified borrowers to take advantage of up to 85% of their home equity.
- Your savings account. A unit secured loan or passbook loan is a type of personal loan that uses your savings account as collateral. These are usually offered by banks and credit unions.
- Your car’s name. Auto title loans, also known as “pink sheet loans” or “property liens,” use your car as the primary collateral for the loan. It’s a high-risk loan because it typically has a short term — usually 15 to 30 days — and charges extremely high interest rates. Due to high fees and interest, this loan option can go downhill quickly if you can’t pay off your debt in a short period of time.
Before using your car as loan collateral, review your other options. Do you have trusted relatives who are willing and able to provide short-term loans? Do you have enough time to save money or find additional income to cover these expenses?
If a loan using your car as collateral is your best option, check out some lenders. Compare repayment terms, interest rates and associated fees to find the loan that’s best for you.