A personal loan is a popular choice for many people when they need some extra cash, and you may be looking into one of these loan options too. If you have a car you want to use as security for a loan, you may be curious whether it is possible to use it as collateral for a personal loan. Some lenders out there can make doing so possible; these loans are called auto equity loans; however, not all lenders will allow for it.
When searching for personal loans with a car as collateral, you will likely come across title loans, also referred to as car title loans or auto title loans. Although these loans may seem like the right fit, they should be avoided if possible. Continue reading to learn more about personal loan options that involve a car, car loans, and title loans.
Is a Personal Loan With Collateral the Right Option for Me?
The first question you should ask yourself about one of these loans is whether a secured loan option is the right choice for you. Secured loans use collateral, while unsecured loans do not.
There are a few reasons why you may want to have a secured loan over an unsecured loan option:
- Secured personal loans offer easier eligibility for borrowers with poor credit history and scores.
- You may get a larger loan amount with a secured personal loan than an unsecured option if you don’t meet income or credit criteria.
Unsecured loans have some advantages over secured loans:
- The interest rates for unsecured personal loans will usually be better, especially if you have good credit.
- There is no risk of losing your asset (in this car, your car) with an unsecured loan.
- The application process is usually faster.
What Kinds of Lenders Do I Need To Look for When Trying To Find a Personal Loan That Uses a Car as Collateral?
As mentioned above, an auto equity loan is a variation of a personal loan that uses the value of your vehicle to make funds available. And so, that means that you must have some sort of equity in your car if you want to borrow this way. However, this does not always mean you have to own the vehicle outright; be mindful of negative equity, as it can mean losing money. With these loans, you will likely be able to continue using your car as you repay your loan.
When looking for personal loans that use a car as collateral, you will likely need to turn to online lenders, as lenders who offer auto equity loans at financial institutions like credit unions and banks are few and far between. You can search for auto equity loans or secured personal loans online. Or you can find a specific lender you want to work with and ask whether they offer the kind of funding you are looking for.
What Are Some Basic Requirements That Lenders Will Look at With My Car?
Because your car plays such an essential part in the auto equity loan process, lenders will look at a few details and have some requirements regarding it. Here are some things to be mindful of before applying for one of these loans:
- They will ask about how much equity you have in the car and information if you have an existing loan on the vehicle (for example, they may ask about how many loan payments you have left)
- They will ask for the car’s title.
- Lenders will likely ask about the car’s make, model, condition, and mileage to get a rough estimate of what the car is worth. Your vehicle will have to be worth at least the loan amount you are asking for.
- You may have to send in photos of your car so they can inspect it.
- Lenders will ask that your vehicle is in working condition and is road safe.
- You may be required to have specific insurance coverage while you repay your auto equity loan.
What Can I Use the Funds for With a Secured Personal Loan?
With a secured personal loan such as an auto equity loan, you can use the funds for all kinds of expenses; here are some examples of how you can use one of these loans:
- Medical bills
- Home repairs or home renovations
- Debt payoff or debt consolidation
- Pet care
- Wedding expenses
- Paying monthly bills such as rent/mortgage payments or groceries.
What About Using a Car Loan to Borrow Money?
An auto loan helps finance a car purchase and is one of the most popular ways that most people purchase a new or used car. When researching auto equity loans, you will also come across car loans. However, if you need extra cash, a car loan will not work; all those loans do is help you pay for a vehicle, and the funds cannot be allocated to any other use. And so, although a car loan may seem like the natural choice for a loan option that uses a car, an auto equity loan will be right for you if you need to borrow money for other expenses.
How Does a Car Title Loan Work?
Another loan option in which your car is collateral for a loan is a car title loan. Title loans make a small to moderate loan amount available for borrowers with all kinds of credit histories. Sometimes with car title loans, there may not even be a credit check. And instead, for approval, lenders will look at the value you have in your vehicle, your income, and your ability to repay the loan. Once you get through final approval, you’ll get your loan funds and, in most cases, be able to drive your car while you make monthly payments on your title loan.
Why Should You Avoid Title Loans?
Although the speed and convenience of title loans may make it seem like they are a good choice for funding, they should be avoided for a few reasons. A recurring variable you will see with these loans is a high annual percentage rate (or APR) on the loan’s interest. Sometimes as high as 300% of the loan (depending on state laws). Along with that, these loans tend to have a lot of fees with them. That high-interest rate and multiple fees make it extremely difficult to repay a title loan, and many people end up losing their cars and hurting their credit scores. And so, title loans should be avoided whenever possible. And auto equity loans are a much better alternative to these loan types.
Getting an Unsecured Personal Loan Even With Bad Credit and Low Income?
Although unsecured personal loans may not seem attainable with bad credit and low income, there may be options. Bad credit personal loans are available for borrowers with no credit history or rough credit; you just have to find the right lenders. There are many online lenders that you may be able to turn to if you need an unsecured loan with poor credit.
Before you take out one of these loans, pay attention to the interest rates, whether it is a short-term loan or a long-term loan option, the repayment fees, the loan term, the loan amount, and the lender.
Improving Your Credit Score To Have To Best Options To Borrow Money Along With Creating an Emergency Fund
Regardless of what kind of loan you are looking for, improving your credit score will help broaden your options, and when you do choose a loan, you will get lower interest rates and repayment terms. Here are some ways to improve your credit scores:
Make Your Payments on Time
One of the best ways to improve your credit score is to make your bill payments on time. Even a single late payment will hurt your scores and will remain on your credit reports for up to seven years.
Keep Your Credit Utilization Low
Your credit utilization measures the amount of debt you have against your available credit. Having your percentage over 30% will hurt your score; anything under that will be helpful.
Pay Off as Much Debt as Possible
Having a lot of debt in ratio to your income will also hurt your credit score. And so, try and avoid unnecessary debt and pay off as much as you can.
Have a Good Credit Mix
Your credit mix looks at the diversity you have in your credit accounts. Having a good combination of different loan types will look good to lenders. While having a high amount of debt from a single type of credit account will be harmful.
Avoid Multiple Hard Credit Checks
Giving a lender permission to conduct a hard credit check will bring down your credit score by a few points. Multiple credit checks in a short period will really hurt your credit score, so you should try and avoid them if possible.
Another thing you should be thinking about is creating a savings account so you don’t have to worry about taking on too much debt. You can start small by allocating money from each paycheck, or you can look into saving-focused budgeting strategies if you really want to dive in.
