Can I Use My Car As Collateral For A Personal Loan?

Images by GettyImages; Illustration by Hunter Newton/Bankrate

If you need extra cash and own a car with a lot of equity, you can use it as collateral for a new loan. The annual percentage rates are usually lower than unsecured loan options, but you could lose your car if you default.

The most common types of vehicle-secured loans are auto equity and car title loans. Both allow you to borrow money based on a percentage of the value of your car, but they are extremely expensive and illegal in some states. Carefully consider other options first.

Pros and cons of using a car as collateral

When you offer your car as collateral for a loan, you take some of the focus off your personal financial profile. Lenders are more concerned about how much they can sell your car for if you don’t repay the loan. However, there are some distinct disadvantages of borrowing against your car that you should know before you apply.

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Types of loans that are secured by your car

There are a few types of personal loans that use a car as collateral, but most are geared toward borrowers with bad credit and may be extremely expensive. While risky, these are often considered decent emergency loan options because of their fast funding timelines.

Secured personal loans

A secured loan is a personal loan that requires collateral in exchange for borrowing money. Because the loan is backed by an asset, it can be easier to qualify for. That lower risk also means lenders may be willing to extend a more competitive interest rate. However, there are very few lenders that offer secured personal loans, so you may be stuck choosing between options that don’t quite fit your needs.

Auto equity loans

You can borrow an auto equity loan even if you still owe money on your current car loan. Your loan is based on the difference between what you owe and what your car is worth. For example, if your vehicle is worth $20,000, and you still owe $12,000, you have $8,000 in equity.

Auto equity loans often have lower interest rates and longer terms than car title loans, but not many banks offer auto equity loans, so you may have a hard time finding this type of financing. It will also result in having two loans — your original auto loan and the auto equity loan — which could complicate your repayment schedule.

Cash-out refinancing

If you have equity in your vehicle, you could be eligible for a cash-out auto refinance. It lets you swap your current car loan for a larger new one, generally with different terms than you currently have, and receive the difference in cash.

The amount of cash you can pull out varies by lender, but it’s generally determined by the amount of equity you currently have in your vehicle and your credit rating. Although this option may seem attractive, it’s risky as you could find yourself upside-down on your auto loan.

Like the other options on this list, not many lenders offer this cash-out refinancing. But unlike auto equity loans, you will only have one loan to manage, so it may be a simplified option that allows you to choose a new lender through the traditional auto refinance process.

Car title loans

With a car title loan, or title pawn, you receive a loan secured by the title to your car. The lender effectively owns a percentage of your vehicle until you repay the loan.

Loan amounts are typically small and only made against vehicles that are paid off. You can typically only borrow between 25% and 50% of your car’s value. Interest rates are normally very high, with some lenders charging an annual percentage rate (APR) of over 300 percent. In addition to the high cost, most lenders require you to repay the balance in 15 to 30 days — an extremely quick timeline that few borrowers are able to manage.

Alternatives to getting a loan against your car title

If you’d like to avoid the risk of using your car as collateral for a loan, there are other options. Personal loans and credit card advances don’t require collateral, and some are open to borrowers with bad credit.

• Unsecured personal loans: Unsecured personal loans do not require using your car as collateral. Because there is no collateral required, this type of loan can be harder to get, and you’ll typically pay a higher interest rate. Lenders also typically have and stricter credit requirements for approval.
• Credit card advances: A credit card cash advance involves borrowing against your credit card’s spending limit. Though convenient, these advance often come with significantly higher interest rates than regular credit card purchases. In addition, most credit card issuers impose a cash advance fee of anywhere from 3% to 5% of the transaction amount.
• Personal lines of credit: A personal line of credit is another form of unsecured borrowing. It functions similar to a credit card, providing you with access to a revolving line of funds that can be used and reused as needed. Unlike a credit card however, a line of credit is only available for a set period of time, known as the draw period. Once the draw period ends, you can no longer make withdrawals. The interest rate on a personal line of credit is typically variable but lower than what is charged on credit cards.

Bottom line

Borrowing against your car should always be a last resort. Before you use your car as collateral for a loan, see if a trusted friend or relative is willing to help out. Check your budget to see if you can save up the funds and pay cash instead of taking out a loan.

If a loan is the best — or only — option, shop rates and terms with a handful of lenders. Take extra time to compare each lender’s interest rates, repayment terms, and fees to get the best deal. Bad credit loan rates may be high, but these loans are less risky than payday or title loan options.