What Are the Best Loans for Using a Car as Collateral?
Total balances for unsecured personal loans reached a record high of $225 billion in Q1 2023, up 26.3% from the same time the previous year. These figures indicate Americans’ growing appetite for personal loans.
If you need money urgently but you’re having difficulty borrowing it, you may consider using your car as collateral for a loan. However, not all car collateral loans are created equal, so it can be rather confusing trying to choose the best one for your needs.
Explore the best loans using a car as collateral by reading this guide.
Auto-Secured Personal Loans
One of the best loan products available for using a car as collateral is auto-secured personal loans. As the name suggests, these are personal loans that use a car as collateral. They can be distinguished from other types of secured personal loans, which use other forms of collateral, including:
- Homes
- Savings accounts
- Investment accounts
- Valuables or collectibles like art, jewelry, and antiques
To get this secured personal loan, there must be no lien on your car. This means that no outside third party should have an ownership claim on the vehicle. If you fail to repay the loan according to the agreed terms, the lender can repossess the vehicle to recover the outstanding debt.
Secured personal loans typically have longer repayment terms and lower interest rates than unsecured loans. This is because the lender has the added benefit of security for the vehicle, making lending money less risky for them. But, how much money they can lend you will still rely in part on your credit score and income.
There are no restrictions on how you can use an auto-secured personal loan. You can use the loan to meet various financial needs, including:
- Medical bills
- Home repairs or improvements
- Education expenses
- Debt consolidation
Repaying your loan on time can help boost your credit score, as it indicates responsible borrowing and repayment behavior.
Auto Equity Loans
An auto equity loan is a type of secured personal loan that allows you to borrow money against the equity you have in your car. If your car’s current resale value is $30,000 and you have a pending loan balance of $8,000, then you have $22,000 worth of equity that you can potentially take out a new loan against.
As with auto-secured personal loans, you can use an auto-equity loan for a variety of purposes. In some cases, you may borrow up to 100 percent of your car’s equity value. However, this is rare because cars are depreciable assets.
The amount of a car equity loan will vary depending on several factors, including:
Creditworthiness
Your credit history and score play a significant role in the lender’s decision on how much they’re willing to lend. A strong credit history tells direct lenders that you’re a low-risk borrower. As a result, you may borrow a higher percentage of your car’s equity value.
Think of it as a comprehensive review of your financial health. This approach benefits both the lender in minimizing risks and the borrower in securing an appropriate loan amount.
Loan-to-Value Ratio (LTV)
The Loan-to-Value Ratio (LTV) is a tool that shows the highest loan amount you can receive based on the current worth of a vehicle you’re using as a guarantee.
Imagine you have a car valued at $10,000. If a bank’s LTV is 70%, then the maximum they’d consider lending you would be $7,000. This makes sure the loan isn’t more than what the car is worth.
Debt-to-Income Ratio
The debt-to-income (DTI) ratio is the percentage of your gross monthly income that you put toward debt repayment. It is used to settle your monthly debt and determine your borrowing risk. Lenders may use it when determining your borrowing risk. This will influence the loan amount you can borrow.
Car Value
When using your car as collateral for an auto equity loan, the lender will require you to bring a vehicle appraisal to confirm the value of the vehicle.
That said, your car is a depreciable asset; so the estimated equity value may drop over time. Your car model and its depreciation rate may affect the auto equity loan amount you can borrow. Newer cars may attract higher loan amounts than older ones.
Before applying for an auto equity loan, you’ll want to first confirm that you have positive equity in your car. Start by getting the vehicle appraised to determine its current market value. Next, subtract any amount you owe on your car loan. If your equity is on the negative or low side, you may want to look into ways to boost it.
Auto Title Loans
When you need fast cash, a car title loan can be tempting. As the name says, this type of loan is taken out against the title of your car.
To obtain the loan, you must own your car outright. This means no third party has a legal claim to your car. If you default on your loan, the lender will take ownership of the vehicle and can sell it to recover the remainder of the debt plus any unpaid interest.
How much you get when you apply for a car title loan will vary depending on several factors, such as:
- Your car’s current market value
- Your equity in the vehicle
- Your income
- Your state laws
Some of the factors that will affect the value of your vehicle include the make, model, age, mileage, and condition. Using the vehicle as collateral for a loan does not mean that you’ll forgo using it. You can still drive it: however, the lender holds the title until the loan is repaid in full.
Car title loans are generally short-term loans that often attract ultra-high interest rates, but they may be a viable option available for people who need bad credit loans. Only consider an auto title loan if you need short-term cash and think that the risks involved are worth it.
Where Can You Get Approved for Car Collateral Loans?
While unsecured loans are a popular option for people who need fast cash for emergencies, borrowing limits may be confined to the borrower’s credit history and score. Car collateral loans allow you to borrow large sums of money with your vehicle as financial security for credit.
These secured personal loans are offered by various lenders, including traditional banks, credit unions, pawn shops, and online platforms. Here’s what to know about each of these lender options:
Traditional Banks
Banks accept cars as collateral for secured personal loans. These loans are generally more affordable and come with lower interest rates than unsecured personal loans, which do not require any collateral. If you’re in good standing with your bank, you may get favorable terms on auto-secured loans from them.
Credit Unions
Local credit unions usually have more lenient lending criteria than traditional banks and they offer secured personal loans with a car as collateral. They may be a good option if you’re looking for better terms than banks can offer, as well as a more personalized service.
Online Lenders
In this digital era, online payday lenders are the go-to source for quick cash. Many online lenders offer auto-secured loans. They often provide faster access to funds and have more flexible qualification criteria. Be sure to compare terms and fees when considering these direct lenders.
Pawn Shops
Some local pawn shops accept cars as collateral for loans. But they’ll require that you be the registered owner of the vehicle and you own it fully. Pawn shop car collateral loans tend to attract higher interest and fees than traditional banks and credit unions, hence they can be more expensive.
Plus, most pawn shops will hold your car until your loan is fully repaid. This means that you’ll be denied the opportunity to enjoy your vehicle.
Peer-to-Peer Lending
Peer-to-peer lending, also known as P2P lending, allows you to borrow funds directly from lenders via online platforms. It eliminates the need to go through traditional lenders like banks or credit unions.
Although secured loans are rare for the P2P lending industry, you may use your vehicle as collateral to get competitive interest rates and flexible terms.
The terms and conditions of getting a loan using a car as collateral vary widely from lender to lender, and so do loan approval times. Take the time to weigh the pros and cons of each lender before borrowing. This will maximize your chances of making the best decision for your financial situation.
Learn More About the Best Loans Using a Car as Collateral
Understanding your options is crucial for obtaining the best loans using a car as collateral. Before taking out any loan, make sure you understand the lender’s terms, interest rates, fees, and repayment schedule. This will help reduce the risk of defaulting on your loan and losing your vehicle.
At Ready Payday Loans, we offer various loan products to help our customers get through tough financial situations. If you have bad credit and you’re having difficulty qualifying for a traditional loan, get in touch today so we can help. We offer solutions to all things unsecured and secured personal loans.
