How to Use Your Car as Collateral for a Secured Loan 

Are you interested in applying for a secured loan and using your car as collateral


Whether you need cash for a medical emergency, renovating your home, or making a large purchase, secured loans can be your savior. Different factors can impact your approval and interest rate, such as the collateral that you will present. 

Among others, one of the most common collaterals you can submit for a secured loan is your car.  You can borrow against the equity of your car. If you default on the payments, then you are giving the lender the right to seize your vehicle. 

Are you interested in applying for a secured loan and using your car as collateral? Read on, and find out the most important things you must know.  

How Does It Work? 

The first step is to make sure you have everything ready. You must have the necessary documents, which will prove legal ownership of your car. 

More so, if you are applying for an auto equity loan you also need to have equity in your car. Simply put, it is the difference between the value of your car and the amount that you owe on the loan. For instance, if your car’s value is $25,000 and your loan balance is $10,000, it means that the equity is $15,000. 

Next, find a lender that you can work with. It is best if you have multiple options, so you can get several offers. A representative of the lender will examine your documents and inspect the car you will present as collateral. Several factors will be considered, such as the age and condition of your vehicle. 

After this, the lender will make an offer. You have the option to accept it if the offer and terms are favorable. Otherwise, you can keep on looking until you find a deal you believe is fair. 

If you are approved for a secured loan, you can still use your car. It remains in your possession until you default on your payments. If that’s the case, then you are giving the lender the right to repossess your car to recoup your debt. 

Decide the Type of Secured Loan 

You have several options when it comes to secured loans using your car as collateral. For instance, you can apply for an auto equity loan. It can be a good choice if you want lower interest rates and if you have built up decent equity in your vehicle. Most of the time, it also has a longer repayment period. 

Meanwhile, some may also opt for an auto title loan instead. It is a kind of short-term loan. However, it often comes with high-interest rates, which can be comparable to payday loans. More so, it is often shorter, which usually takes only a month. It is better if you stick to an auto equity loan.  

Compare Lenders 

Take your time. It can be tempting to say yes to the first offer you receive, especially if you are in a hurry to get cash. However, it is best if you can look for at least three lenders and compare their offers to find the best deals. 

Among others, one of the most important things to look at is the interest rate. Compare it against the repayment term. In most cases, a shorter repayment period means a lower interest rate.

Alternatives to Using Your Car as Collateral 

For some people, using their car as collateral may not always work. For instance, you might have an old car, which a lender may no longer see as a valuable asset. If you are looking for alternatives, below are some options worth considering. 

  1. Share-Secured Loan 

With a share secured loan, you can enjoy short-term borrowing that uses your savings account as collateral. It has simple requirements and can also be a great way to build a credit history. However, take note that the amount you will be approved for depends on how much savings you have.   

  1. Peer-to-Peer Loans 

With peer-to-peer lending, you can loan directly from other individuals. This way, you are cutting any financial institution acting as the middleman. The interest rates can be competitive, but they can greatly vary from platform to platform.  

  1. Home Equity Loans

Instead of having your car as collateral, you will be using your home instead if you are applying for a secured loan. Because of the rising value of real estate, you might be able to loan a higher amount when you use your home equity compared to using your car title. 


Photo by Scott Graham on Unsplash

Applying for a secured loan using your car as collateral can help you raise emergency cash. However, take note of the risk – you might lose your vehicle if you cannot repay your obligations. Also, choose an auto equity loan over a car title loan. Most importantly, shop around to find the best rates you can qualify for. 


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