Has your loan application ever been declined? It feels bad to apply for a loan and not qualify. For this reason, individuals do so many things to prove to improve their chances of qualifying. For instance, many choose secured and easily qualify. When you attach an asset as collateral, the lender feels relieved of many risks and that is why you can easily be approved for a loan. Nevertheless, if you have good credit, you can qualify for business loan.
Banks and other money lenders often want to give loans to the most reliable borrowers, something they determine using credit score. Secured loans can be utilized by individuals irrespective of their credit. Today we want to focus on using the car as collateral. Our question of interest is – can you borrow money using your car as collateral? Let us see.
Borrowing Against Your Car
It is possible to borrow money against your car. We know how challenging it can be to obtain a loan. Maybe you are sweated there wondering whether you can qualify for another loan. Do you have an auto which is paid off? You can secure a loan using it.
In fact, it is possible to obtain a loan using an auto that is not fully paid off as collateral. In this case, you will be required to have sufficient equity in the vehicle. However, securing a loan with a car is very risky. You don’t want to lose it and so you must talk to an expert before the contract is signed.
Loans taken using a car as collateral are often referred to as Car Title Loans. This is because you will have to pledge the auto as security by transferring the title to your creditor until you fully repay the loan. These loans are always handy when individuals are plagued with emergencies. Nevertheless, they may turn out to be so costly than their real value.
How it Works
As we pointed out in the preceding section, you need to have sufficient equity in the auto to borrow against it. Though it is possible to secure a loan if the auto is not fully paid off, many lenders require that the loan used to acquire it be fully settled. The amount of the loan often ranges between $100 and $5,500, though some lenders go beyond this range.
The amount allowed depends on the worth of the auto or your equity in it. The higher the value, the more funds you can receive. It will be absolutely ridiculous to attempt to get the entire value of the auto in a title loan.
Lender always want to give the amount they can easily regain in case they are required to repossess and sell your car. In many cases, lenders accept to give loans of up to 50% of the value of the car. Sometimes they may want to fix a GPS tracking tool on the car to ensure borrowers do not hide the vehicle but rather pay the loan.
It is important to mention also that these arrangements often work with storefront loans. Car title loans are common in storefront financial institutions. However, credit unions and also lend money against cars. In fact, you get the most appropriate deals if you consider either of these two options. You may be allowed for longer repayment periods and reasonable rates.
Car title loans are often short term and you will be expected to repay within 30 days. For this reason, you will be required to make an arrangement of getting a full repayment, commonly referred to as balloon payment. Individuals find it quite challenging to raise this amount. So, what happens if you cannot afford the balloon payment?
You can rollover. Rather than repaying the loan, you can get a fresh one-month loan. But again, this is a very expensive way of borrowing. You will be required to pay new loan charges whenever you take this option. For this reason, there are limitations to rolling over in some regions. But what is the actual cost of borrowing in this regard?
It is good to consider the interest rates carefully when applying for a loan. For instance, the lenders of car title loans may charge an interest of 25% in one month. This sounds reasonable, right? But what if you were to carry the loan for the whole year? The actual APR will be 300%. Isn’t that too expensive? We asked about the overall cost of borrowing…
The borrowing costs are high. Generally, lenders charge higher rates compared to what one would be expected to pay on credit cards. Even though the law may limit the rates, they are still very high. Additionally, you are also required to pay some fees to secure the loan. Such fees raise the overall cost of borrowing.
Even though the fees are not referred to as “interest”, one is required to pay since it is included in the outstanding loan balance. Just like in payday advances, you may be required to repay severally the amount borrowed, making it a costly option of financing your needs.
Losing Your Auto
Sounds threatening, right? But that is exactly what happens when you cannot afford the payments. The credit is at liberty to sell the car to recover the outstanding balance. Worse, lenders often keep the whole value of the proceeds made from the sale of the car since that is what it sells for. This can have devastating impacts on your quality of life.
In fact, it may take you longer to get over the effects that come with this move. If you don’t need to borrow against your car, please don’t do that. There are many less costly financings options. Try to compare loans online if you need cash instantly and you will get a better deal.
The Bottom Line
It is possible to use your car as collateral for a loan. Nevertheless, this is an expensive approach. It is also very risky because you don’t afford the payments, you may end up losing your auto. We advise you to look for an alternative financing option rather than to risk losing your car.
Interesting related articles: