Can I Use My Car as Collateral for a Loan?

If you’re facing an unexpected financial hurdle and need funds quickly, your car may come to your rescue.

In the financial world, “collateral” refers to an asset you offer a lender to secure a loan. If you fail to repay the loan, your lender can take the collateral as compensation. In this context, your car can serve as collateral for a loan, providing you with the necessary funds while you retain the use of your vehicle.

Yes, you can use your car as collateral for a loan — specifically, an auto equity loan. This type of secured personal loan allows you to borrow money against the value of your car.

In an auto equity loan, the lender assesses the value of your car based on factors like its make, model, mileage and condition, as well as any existing loans on the vehicle. The lender will then determine the amount of equity you have in the car.

Note that the amount you can borrow depends on the equity in your car. Typically, lenders will allow you to borrow a percentage of your car's equity, ranging from 25% to 50%. For example, if your vehicle is worth $10,000 and you still owe $4,000, your equity is $6,000. In this case, the lender might allow you to borrow $1,500 to $3,000.

You can continue using your car as you normally would during the loan period. If you fail to repay the loan or default on your payments, the lender has the right to repossess your car. They can then sell it to recover the loan amount.

While the terms "auto equity loans" and "car title loans" are often used interchangeably, they can differ. Understanding them can help you determine which option is right for you.

Auto equity loans are typically used by individuals with equity in their car, meaning the car is worth more than the remaining balance on their car loan. Borrowers can take out a loan against this equity, with the amount based on the value of the car.

Meanwhile, car title loans are often used by those who own their car outright without any outstanding loans or liens against it. The loan amount is based on a percentage of the car's value. Car title loans typically have higher interest rates and shorter repayment terms than auto equity loans.

Using your car as collateral for a loan can be a double-edged sword, offering both benefits and drawbacks. While it can provide quick access to cash, especially for those with bad credit, it also carries risks, including high-interest rates and the potential loss of your vehicle if you can't repay the loan.

Before using your car as collateral for a loan, weighing several key factors, like your ability to repay the loan and insurance requirements, is crucial. This can help ensure you’re making a financially sound decision that aligns with your circumstances.

Remember that using your car as collateral for a loan is a significant decision that can impact your financial health and daily life. Considering all these factors and exploring your options before proceeding is important.

While using your car as collateral for a loan can be a viable option, it's not the only one. You can use several other assets as collateral to secure a loan, including your home and savings account.

MoneyGeek answered some frequently asked questions about using your car as collateral for loans to provide clarity and guide you toward making an informed decision.