Yes, you can get a loan using your vehicle as collateral. But you should note that car loans usually carry high interest rates and should really only be used if there’s no other way to get cash and you need funds very quickly.
Collateral loans, especially those using vehicles, are becoming popular for their flexibility and fast approval process. However, there are advantages and disadvantages that must be considered, as with any financial decision.
In this article, we will examine the pros and cons of car title loans and look into a couple of real-world examples to help you decide if securing a loan with a vehicle is something for you.
Key highlights:
Car loans using vehicles as collateral are fast but come with high interest rates, making them a last-resort option for quick cash needs.
Car title loans can charge up to 300% APR, making them an expensive borrowing option with significant financial risks.
Defaulting on a car loan can result in the lender repossessing your vehicle, so understanding and meeting repayment terms is crucial.
Most car title loans last between 15 and 30 days, with some lenders offering 60-day repayment options.
What is a loan using a vehicle as collateral?
Loans using vehicles as collateral, also known as auto equity loans or car title loans, allow you to borrow money using your car as security. This type of loan provides a way to access funds without selling your assets. The lender places a legal claim (commonly referred to as a lien) on your vehicle’s title until the loan is repaid.
There are primarily two types of loans in this category: title loans and auto equity loans. Title loans are short-term loans where the car title is used as collateral. These loans typically have higher interest rates and shorter repayment periods. Meanwhile, auto equity loans are based on the equity you have in your vehicle. They usually offer longer repayment terms and lower interest rates compared to title loans.
It’s worth noting that using a car as collateral should really only be used as a last resort. These types of loans are very expensive, with companies often charging up to 25% monthly interest rates, which amounts to a whopping 300% annual interest rate (APR). In other words, you can expect to pay up to $250 on a $1,000 loan per month.
Can I use a financed car as collateral for a loan? Typically, you need to own the car outright or have substantial equity in it. If your car is financed, it may not qualify unless you have paid off a significant portion of the loan, typically at least 50%.
Examples of a car loan
Let’s look at some real-world examples of using a vehicle as collateral to secure a loan. For this calculation, we referred to Consumer Reports to get data about used vehicle prices and LoanMart to get a sense of how much cash you can expect to get for each car model. It’s worth noting that the mileage used for each when making the calculation was set at 50,000 miles.
Ford F150 (2015) Toyota RAV4 (2017) Chevrolet Silverado (2019) Car Value* $18,350 $21,200 $31,600 Max Loan Amount** $6,975 $13,031 $15,000 Loan to Value 38.0% 61.5% 47.5%
*Data collected from Consumer Reports. **Data collected from LoanMart.
As you can see, loan to value (LTV) roughly ranged from 30% to 70% in our examples. This comes close to real-world experience, with most companies offering car title loans with LTVs between 25% and 70%. In other words, companies offering car loans are prepared to pay out as much as 70% of the vehicle’s value as a loan. Of course, the higher the LTV, the higher the interest rate, and the higher your total loan balance.
How do auto equity loans work?
Understanding the process of securing the loan can help you decide if this loan type is right for you. The process of securing a loan can be split into four main steps, including:
Valuation: The lender assesses the market value of your vehicle. Make sure that
Loan amount: You can typically borrow a percentage of your car’s value (25% to 70% LTV is the norm).
Lien placement: The lender places a lien on your vehicle’s title, which means the ownership of the vehicle is transferred to them in case the loan isn’t repaid.
Approval and funding: Once approved, you receive the loan amount, often within 24 hours or a couple of days at most.
If you want to apply for a loan, there are several requirements that you must fulfill, most importantly, your ownership of the vehicle. Here’s the full list of eligibility criteria:
Vehicle ownership: You must own the car outright or have significant equity in it.
Car condition: The vehicle should be in good condition.
Income proof: Demonstrate your ability to repay the loan.
Identification: Valid ID and car insurance.
Pros and cons of loans using a vehicle as collateral
Every financial decision has its upsides and downsides, and car title loans are no different. Here’s what you should consider:
Advantages of vehicle collateral loans:
The approval process is faster than that of traditional loans.
There's no credit check, as your credit score isn’t a primary concern.
You can continue using your vehicle while repaying the loan.
Disadvantages of vehicle collateral loans:
Defaulting could lead to losing your car.
Up to 300% APR is way more than other types of loans and more than even the most expensive credit cards; like the Indigo credit card, for example.
Shorter repayment terms than other loans, with most car title loans last 15 to 60 days
The bottom line
Using your vehicle as collateral for a loan can be a viable solution for quick financial needs. While it offers benefits like fast approval and no credit checks, it’s essential to be aware of the risks, including the potential loss of your vehicle and very high interest rates. If managed responsibly, auto equity loans can provide the funds you need without sacrificing your mobility but remember that they really shouldn’t be used for long-term loan needs.
If you need a loan, especially for larger amounts, we would strongly recommend you stay away from car title loans and instead approach one of the best regional banks to inquire about their loan offerings.