Auto loans are loans backed up by some collateral. The most common kinds of collateral are house, car, and personal property, like antiques. Another type of collateral is un-retired stocks and bonds, a personal loan from a company you work for, or a second mortgage on your home (a third mortgage if you already have a first mortgage).
Auto Collateral Loan It is important to realize that your car can be repurchased by the lender in case you default; it will satisfy your debt. This may seem intimidating or scary at first, but if you consider the options beyond the title loan you are considering, it might be a better deal. Bankruptcy may not impact your credit score as much as a title loan. The best option for you, however, is to continue making payments on time for your auto payment. In some cases, payday loans keep administrative costs and application fees from their customer base. Title loans will automatically disqualify people with bad credit scores and for good reasons. If they are your only option, consider directly taking out a title loan with a willing lender.
Tip: If you can easily get in debt and want to start over again in a few months, don’t immediately close your other accounts.
On the other hand, if you are disciplined enough and want to establish a new credit record based on responsible money management skills, closing out all of your earlier accounts could be your solution.
Are collateral loans a good idea?
It depends on several factors. You need great credit (credit score of 700 or more, if you have collateral). It would help if you also had a pretty low-interest rate, a relatively short loan term, and a solid job that ensures you will make regular payments. That way, you can borrow enough to cover your bills at the new, higher interest rate.
The Pros and Cons of Collateral Loans
These loans have some advantages, but they also have a lot of downsides. Let’s take a look:
- The main advantage is that you can borrow a lot of money. Many auto loans, car loans, and home equity loan programs are written to help people who owe more money than they have available credit. As such, it is possible to borrow six times your annual income in such loans.
- The interest rate on these loans tends to be pretty low. Interest rates range between 5% and 28%. However, rates on those with lower credit scores or lower incomes tend to be higher, probably around 25%. There are two major disadvantages: (Luckily, the student answered this one for me.)
One disadvantage is having less credit available. If you spend the extra money you borrow but do not put the extra money to good use, your debt-to-income ratio will go up, usually increasing your monthly payment. This makes it more difficult to pay for care costs and other expenses that raise your monthly payment. Another disadvantage is that the lender cannot take your collateral if you fail to make a payment. This means that if you do not make a payment or you lose your job and cannot cover bills, the lender cannot take your house (for example) to pay off the loan. This gives an incentive for borrowers to get serious about managing their finances. They know they will have some serious debt if they fail to make payments on time.
One of the major pros of these types of loans is their lack of prepayment penalties. Most lenders do not charge prepayment penalty fees, which means that you can pay off your loan early without owing a fee. Another advantage is that you have more ownership of your property. You can sell your house or car to pay off the loan, but you cannot do that with a home equity line of credit if you can’t pay it off early.
How to apply for auto Collateral Loans?
First, you need to do a lot of research to ensure that you are getting a good deal. There are many businesses online that can provide you with a loan application calculator and help you determine how much you can borrow and at what price to understand the costs of borrowing. There are also websites where you can get free credit reports and learn about your credit score. You can use this info to understand better what lenders think about your ability to pay back debts. Next, make sure that all of your financial information is up-to-date. You may want to have someone help you if your records are not current because this is how you will qualify for the loan. Next, fill out an application for a mortgage or car loan. Have the lender show it to you, ask her/him questions about it, and find out what must be completed to qualify for the loan. Sometimes lenders make automatic rejections based on the form’s errors, so everything must look right before you submit it to the lender. If there is any question in your mind about whether or not the application will be accepted, wait until it does not have any errors before submitting it. Then, wait for feedback from the lender. They may call you and ask some questions or send an email stating whether the loan is approved.
Requirements for Auto Collateral Loan
You need to meet several requirements before taking an auto collateral loan if you want to go for it.
- The loan amount must be less than half of your equity in the vehicle.
- The interest rate on the auto collateral loan should not be more than 20% or 25%.
- You should also have your very own vehicle since you cannot take any interruption if you do not have a personal car just for yourself.
- Lastly, there is a good but technical note about the auto collateral loan; You will need to use it as an emergency when you get into financial trouble.