Need cash and don't have good credit? Your car could hold the answer.
Thousands of Americans turn to vehicle collateral loans for emergency cash each and every day. Instead of going without, many people are increasingly making the most of their assets, and using the equity in their cars to get the funds they need.
Here's the thing…
Automobile collateral loans are cash advances you take out by using your car as collateral or security for the loan. You can qualify for these emergency loans with bad credit or no credit at all. It's a simple process and since your car title is used to secure the loan, the lender is willing to let you borrow more.
Before you take out an automobile collateral loan in Tallahassee, it's important to understand how it works and how it will impact your financial life moving forward.
What you'll learn:
- How Automobile Collateral Loans Work
- How The Loan Process Works
- Benefits Of Using Your Vehicle As Collateral
- Important Considerations Before Borrowing
How Automobile Collateral Loans Work
Automobile collateral loans are cash advances that are secured by your vehicle. Your car or truck acts as collateral for the money that you borrow.
Simply put, the lender places a lien on your title while you repay the loan. This means you don't get to use your car and they can legally repossess it if you default.
Why would a lender offer these loans?
Because they are much lower risk. There's currently more than 1.64 trillion in auto debt nationwide. That's a huge market and a lot of loans. By only lending to borrowers who have collateral securing their loan, the lender can approve people who might not be eligible for a traditional bank loan.
This is in contrast to unsecured personal loans where the lender has nothing to seize if you default. For automobile collateral loans your car title acts as an insurance policy.
Simple, right?
How The Loan Process Works
The application process for automobile collateral loans is actually less difficult than most people realize.
Here's how it works:
First, you apply with the lender and provide information about your car. This will typically include the make, model, year, mileage, and general condition.
The lender then assesses the value of your vehicle. This is important because your loan amount will be based on this amount.
Most lenders will loan you between 25% and 50% of the total value of your vehicle. For example if your car is worth $10,000 then you may be able to qualify for between $2,500 and $5,000.
And here's where it gets interesting…
You are generally able to keep driving your car while you repay the loan. In a pawn shop, you are not able to use the item you pawns after you hand it over. In the case of automobile collateral loans, you are able to maintain access to your vehicle during the repayment period.
There is a catch. The lender will place a lien on your title. This means that they will have legal claim to your car until the loan is repaid in full.
What Documentation Do You Need?
The application and approval process is actually pretty simple. You'll need:
- Title to the vehicle (in most cases, this must be owned free and clear)
- Government issued photo identification
- Proof of income
- Proof of residence
- Proof of insurance on your vehicle
- Recent photos of your vehicle
If approved, you can often receive your funds in less than 24 hours. Emergency funds when you need it.
Benefits Of Using Your Vehicle As Collateral
If millions of Americans are taking advantage of automobile collateral loans, then there must be some benefit to it, right?
Allow me to outline the benefits of using your vehicle as loan collateral.
Quick Access To Cash
Time is of the essence when you need an emergency loan and automobile collateral loans offer it. Traditional loans from banks can take days or even weeks to get approved and funded. Automobile collateral loans? You could be walking away with money in hand the next day.
Easier Approval Process
Something most people don't realize: Your credit score doesn't matter as much with a secured loan.
The lender has your vehicle as collateral, so they are willing to work with people who have poor credit or a limited credit history. In fact some lenders don't even check your credit.
Lower Interest Rates Than Unsecured Options
Compared to payday loans and unsecured personal loans, automobile collateral loans offer some more competitive rates. The interest won't be cheap. But in most cases, it will be better than the rates you'd qualify for if you had bad credit.
The collateral reduces the overall risk to the lender, which can translate into slightly better terms for the borrower.
Flexible Loan Amounts
The total loan amount you can get will vary based on the value of your vehicle. This means that if you have a newer vehicle in good condition, you might have access to more money than you would through another type of short term loan.
Important Considerations Before Borrowing
Before I wrap this up, let's look at a few important facts…
Automobile collateral loans aren't all sunshine and roses. There are real risks involved and you should be aware of them before you sign any paperwork.
Risk Of Vehicle Repossession
This is the big one. Roughly 20% of borrowers eventually have their vehicle seized. If you can't make your payments, the lender will take your vehicle.
But here's the kicker… Having your vehicle repossessed can do more than just leave you without transportation. It can affect your ability to get to work, care for your family and run your day-to-day affairs.
High Interest Rates And Fees
While the rates are much better than payday loans and credit cards, the interest can still be very high. We're talking 300% APR for some lenders. Yep, you read that correctly.
You might also be hit with origination fees, processing fees, late payment penalties, and prepayment penalties with some lenders. All these fees add up and can make a small loan very expensive in the long term.
Short Repayment Periods
Many automobile collateral loans must be repaid within 15 to 30 days. This is an incredibly short window. If you can't repay the full loan plus interest and fees in this timeframe then you might have to roll over the loan. This means you pay additional fees and interest.
This can lead to a cycle of constant borrowing as you try to keep up with payments.
Making The Right Decision
Should you get an automobile collateral loan?
It all comes down to your individual circumstances. This can be a useful loan product when used responsibly. But it can lead to serious financial consequences if not used wisely.
Consider these questions:
- Can you realistically repay the loan in the given timeframe?
- Do you have other options available?
- What happens if you lose your vehicle?
- Do you understand all of the terms and fees?
If you do decide to go ahead with an automobile collateral loan, take some time to comparison shop. Different lenders will offer different terms and rates. Taking the time to research and compare can potentially save you hundreds of dollars. Look for lenders that offer transparent fees, reasonable repayment terms, and a good reputation.
And remember, read the fine print before you sign anything.
Final Thoughts
Automobile collateral loans offer a way for people to quickly access cash, without having to go through traditional banks or lenders. By offering the title to your vehicle as collateral, you can quickly and easily access the funds you need with far less stringent credit requirements.
But there are risks with that benefit. The combination of high interest rates, short repayment terms, and the potential for losing your vehicle make these loans something that you should only take out with extreme care.
If you are thinking about taking out an automobile collateral loan:
- Read and fully understand the terms and conditions
- Develop a realistic repayment plan
- Exhaust all other options first
- Only borrow what you absolutely need
Your vehicle is likely one of your most valuable assets, so be sure to make any decision about using it as collateral carefully and with a full understanding of the potential risks.
