Personal Loans Using Vehicle as Collateral

Are you considering a personal loan to resolve a sudden financial emergency? If you have less-than-perfect credit, a personal loan using your vehicle as collateral could be one of the options to consider. You may already know that secured loans can provide borrowers with some advantages over unsecured loans, and that there is a variety of items you can use as collateral for personal loans, including your car or truck. Keep reading for an introduction to vehicle collateral loans, their pros and cons, requirements and alternatives to consider before applying.

What Are Personal Loans With Vehicle Collateral?

Personal loans that use an auto as collateral are offered by multiple lenders. Getting a vehicle-secured personal loan requires that the customer owns a paid-off or close to paid-off vehicle, is willing to use the vehicle as loan collateral, and can provide the required documents to verify vehicle ownership and income.¹

As the name suggests, the intended purpose of the loan needs to be for personal, family or household expenses, not for a business. The loan application and loan agreement will typically include language requiring the borrower to confirm the intended use of funds is in fact for personal use.

How Do Personal Loans With a Vehicle As Collateral Work?

As with any personal loan, the general process to get a loan using a car as collateral entails the following steps:

• Completion of a credit application
• Loan approval by the lender¹
• Review of required underwriting documents
• Execution of a loan agreement and loan funding
• The borrower making scheduled payments until the loan is paid off

During the application for a vehicle-secured loan, prospective borrowers usually need to provide basic details about their vehicle, such as the make, model, year and current odometer reading, since the value of the vehicle is a key component of the lenders’ underwriting criteria.¹

Depending on the lender, the loan application may include a credit check. Once approved, the lender will advise the borrower what supporting documents are required for loan underwriting purposes, which typically include documents to verify the vehicle and vehicle ownership, and documents to confirm the applicant’s identity, address and income.

If the applicant accepts the lender’s loan approval, the applicant signs the loan agreement, which outlines the lender’s and borrower’s rights and obligations that come with the loan. Upon making the loan, the personal loan lender places a lien on the title of the vehicle that’s used to secure the loan. The lien documents the lender’s right to the vehicle in the event that a borrower defaults on the loan. Despite the fact that a lien is placed, the personal loan borrower can continue driving the vehicle while making timely loan payments. Once the loan is paid off, the lender will remove the lien against the car.

Pros And Cons Of Vehicle Collateral Loans

Online loans with car as collateral offer some unique advantages, but also come with some potential risks that applicants may want to consider before borrowing money against their car.

The potential advantages include:

• Quick funding: Loans that are based on the equity of the vehicle are usually set up for fast processing – many lenders that provide secured loans against vehicles are able to provide same day funding to approved applicants.^{1 3}
• Flexible approval requirements: Since vehicles are used as collateral to secure the repayment of the loan, the approval requirements for car collateral loans tend to be more flexible than the requirements for unsecured loans.
• Continued use of the vehicle: Even though their car or truck is used as loan collateral, borrowers can continue using their vehicle as normal, as long as they are making the agreed-upon loan payments on time.

The potential disadvantages include:

• Risking the collateral: Borrowers who take out a vehicle-secured personal loan risk their vehicle if they don’t keep up with the payment schedule outlined in their loan agreement. While being late on one payment for just a couple days doesn’t typically result in immediate repossession of the car, being significantly late or missing several payments creates a real risk.
• Interest rates: Vehicle collateral loans are usually designed with credit-challenged borrowers in mind, and therefore can come with higher interest rates, especially compared to bank loans.
• Fees: The lender’s placement of the lien requires that the lender pay a processing fee to the state DMV, county, or applicable government agency. Lenders usually pass on this government fee to the borrower as part of the total amount borrowed. While that fee can be as low as $7-$15 in states like Oklahoma, Nebraska and Kansas, some states have significantly higher lien placement fees.

Alternatives to Personal Loans Using Vehicle as Collateral

Using a vehicle as security to get cash is only one option that borrowers with less than stellar credit can use. Alternatively, the following credit options can be available to subprime applicants with an urgent cash need:

• Cash advances: Cash advances can come in different forms. They can include borrowing against an existing credit limit on a credit card, or applying with a cash advance provider.
• Unsecured loans: Unsecured loans cover the entire credit spectrum, from prime customers with high credit scores to subprime customers with some or major blemishes on their credit report.
• Assistance programs: Rather than applying for a loan or line of credit, getting financial support through assistance programs could turn out to be the best alternative.

Key Considerations For Vehicle Collateral Cash Loans

If you are thinking about applying for a personal loan using your car as collateral, giving some thought to the following can help you make a good financial decision:

• Consider alternatives: Before applying for a loan that’s secured with your vehicle, give some thought to the pros and cons of vehicle secured loans and the available alternatives. Apply for a secured loan only if that is likely to offer the best solution for your needs.
• Compare lenders: In order to find the best loan offer, you can apply with multiple lenders. Compare the key terms of all loan approvals you receive so you can choose the approval that best aligns with your needs. Be sure to consider the cost of the loan, expressed as an Annual Percentage Rate (APR).
• Find a reputable lender: When choosing which lender to use for a vehicle-secured personal loan, you can use trustworthy review sites like Google ratings, the Better Business Bureau or Trustpilot to see what other customers have to say about their loan experience.
• Be sure to only borrow what you can comfortably repay: Since you are potentially risking your vehicle, be sure to only take a loan with monthly payments that fit your budget. Being able to afford the loan payments is your best protection against the risk of vehicle repossession.