Is It a Good Idea to Use a Car as Collateral for Loans?

If you are shopping for a personal loan but you’re struggling to qualify for a competitive rate, you may be considering a secured loan. Using your car as collateral can improve your chances of approval and lower your interest rate. This article explains how to go about it.

Can you use your car as collateral for a loan?

The short answer is yes, you can use your car as collateral for a loan. Using your car as collateral on a loan means if you default on a loan, the lender can seize your car to compensate for the financial loss.

The catch to using your car as collateral is that it must have equity. Equity is the difference between what the car is worth and how much you owe on it. So if the car is worth $30,000 and you have paid off $10,000, your equity is $20,000.

The downfall to this is that cars’ values diminish over time, and many drivers owe more than the car is actually worth. Because of this, your car may have little to no equity. If that’s the case, then you cannot use it as collateral. Additionally, some lenders require the car to be less than five years old. If you have an older car, you may have to use something else as collateral.

Which loans can I use my car as collateral for?

The most common loans you can use your car as collateral for are secured personal loans (also called auto equity loans), cashback auto refinance, and car title loans. Most of these are offered by online lenders and credit unions.

Personal loans

Unsecured personal loans can be used for a variety of reasons, such as covering emergency expenses, medical expenses, and more. But, if you don’t qualify for one or can’t find one with low interest rates, you may have to turn to a personal secured loan.

Secured loans are a type of personal loan that is backed by collateral. Secured loans backed by a car are sometimes referred to as auto equity loans. Typically, lenders don’t require a certain minimum credit score to qualify for an auto equity loan, which is why it’s appealing to those who may not be eligible for an unsecured personal loan.

Cashback auto refinance

A cashback auto refinance loan will allow you to access the equity of your car in cash. This loan refinances your car loan and gives you a part of the equity back in cash. The downside of this is it adds to the debt you have on your car and lowers how much it is worth.

However, if you simply need to refinance your current auto loan, you may want to consider one of the refinancing lenders below.

Car title loans

A car title loan is a short-term loan you can use your car as collateral for. You will give the lender your car title in exchange for a lump sum. The amount of money you receive is based on the appraised value of the vehicle. Generally, you’ll get to borrow between 25% to 50% of the car’s value and have approximately 15 to 30 days to pay off a car title loan.

Car title loans have high fees and can have an annual percentage rate of about 300%. Because of this, car title loans are usually only recommended in times of financial emergency. If you believe you’ll have the money to quickly repay a car title loan, take a look at some of the options below.

Pros and cons of using your car as collateral

If you’re in need of cash fast, then it may be worth using your car as collateral. Here are some of the other major benefits and downfalls of using your car as collateral on a loan.

Alternative solutions

You have a few other options when it comes to using your car as collateral for a loan. First, a car is not the only thing you can use as collateral. You can also use a boat, house, jewelry, cash from a savings account or CD, art, antiques, or a life insurance policy with cash value. So if a lender does not accept your car as collateral, you have other options.

You should also explore other options besides taking out a loan. Perhaps a close family member or friend will be willing to lend you some money. If you have savings or an emergency fund, now may be the time to put that to work. If you don’t have a savings account yet and the purchase is not an emergency, consider opening an account and start a savings plan today.

FAQs

Is it smart to use your car as collateral for a loan?

It depends on your financial situation, but keep in mind that using your car as collateral means it could be repossessed. If you are certain you will not default on your loan, then using a car as collateral could be a smart idea.

Does my car have to be paid off to use as collateral?

No, your car does not have to be paid off. You can still owe money on your car and use it as collateral.

Does collateral have to equal the loan amount?

Generally speaking, most lenders want the collateral to match the loan amount. This is why your car must have a decent amount of equity built up to be used as collateral.

What cannot be used as collateral for a loan?

You cannot use cars older than five to seven years old and funds from a retirement account as collateral for a loan.

Camilla Smoot

Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.