Auto Equity Loan: Using Your Car as Collateral for a Personal Loan

Amy Lyons  | 

Auto equity loans allow you to use your car as collateral to qualify for a secured loan. This type of loan is often used by those seeking a loan with poor or bad credit. When you use your car as collateral, you are borrowing against the equity or value of your car.

While using your car as collateral can help you get the loan you need, or can be used as a tool to build your credit, if you miss payments and don’t pay back the loan, you could be in danger of defaulting or surrendering your car to the lender.

What Is an Auto Equity Loan and a Title Loan?

Using your car as collateral for a personal loan may be called a vehicle collateral loan, a car title loan, or an auto equity loan. However, there are a few specific details to be aware of when using your car as collateral.

Typically, you would take out an auto equity loan if you do not fully own the vehicle. A car title loan allows the lender to hold your car title as collateral for a loan. When you use your vehicle as collateral for a loan, the vehicle acts as a guarantee that the loan will be repaid.

When you use your vehicle as collateral for a loan, the lender places a lien on your vehicle. A lien on the title of your car means that the lender has an official financial stake in the vehicle. This type of loan is considered a secure loan. A secured loan offers a guarantee to the lender that if you do not make your payments for the loan, the lender can use your collateral (car) to pay back the loan.

How Does a Vehicle Collateral Loan Work?

To apply for a loan using your vehicle as collateral, you will need to discover the value of your vehicle. You can do this with the Kelley Blue Book, or you could receive an estimate on the value of your car. You will also need access to your title. If you do not have the title of the vehicle, you’ll need to apply for a duplicate title through your state’s Department of Motor Vehicles (DMV). When you apply for the loan, the lender will double-check the value of your vehicle. The value of your vehicle will directly impact the loan amount you qualify for.

You may also be asked to provide additional personal information and documentation that includes:

  • Proof of identification, such as a government-issued ID, driver’s license, state ID, military ID, or passport.
  • Proof of income.
  • Proof that your car is currently registered and titled in your name.
  • Proof of residency that matches the name on the title.
  • Proof of comprehensive car insurance and collision insurance.
  • Photos or proof of the vehicle’s VIN plate, odometer reading, and license plates.

Typically, if you are approved for a secure loan by using your car as collateral you can access the funds of the loan quickly. For some lenders, it may even be the same day.

Where Can You Get a Loan Using Your Car as Collateral?

You may need to do some research to find a lender that uses vehicles as collateral. Some major banks may not allow you to use your car as collateral. You may need to check with different financial institutions to see what their policies are in regards to auto equity loans. Applicable institutions may include

  • Banks both large, small, and local.
  • Credit unions.
  • Online or other financial lenders or companies.

What You Should Know About Using Your Car as Collateral for a Personal Loan

Using your vehicle as collateral to get a loan has advantages and disadvantages. The following information may help you decide whether using a car title loan is the right decision for your financial strategy.

Pros

  • If you need access to funds quickly, using your car as collateral can typically help get you approved for the loan you need — and fast.
  • Because you are offering your car as collateral, you may be eligible for short-term loans even if you have no credit history or an average or poor credit score.
  • Typically, if you use your car as collateral for a loan, you can use the funds for any purpose. This type of loan is effective for those with immediate or unexpected costs or bills that they do not have the budget or emergency savings to cover.
  • If you are looking for an option specifically to build up your credit over time, you can apply for a title loan and use the loan money to pay back the loan with regular and on-time monthly payments to build credit over the term of the loan; however, you’ll need to account for the interest payments as well.

Cons

  • Auto equity loans and title loans may come with a high APR or a short loan term. You will need to thoroughly discuss the terms of the loan with your lender to decide if it is the right financial choice for you.
  • Some auto equity loans may cost additional DMV lien fees that are included as part of the loan, meaning you will pay interest on these fees over time.
  • If you use an auto equity loan, you are adding to your debt. Because cars depreciate in value over time, you may end up owing more than your vehicle is worth which is called an upside-down car loan.
  • In addition to losing your vehicle, if you do not pay back your title loan, it can harm your credit score.

Using your car as collateral for a loan can be a risky financial move, if you can’t keep up on the loan payments, you may lose the rights to your vehicle to your lender.

If done correctly, a loan using your car as collateral can get you access to fast cash, and may help you build your credit along the way. If you do not want to use the vehicle you primarily use for transportation as collateral, you may also consider asking your lender if you can use your motorcycle or RV.


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