An Essential Guide to Using Your Car as Loan Collateral

An Essential Guide to Using Your Car as Loan CollateralThe main advantage of owning a car is having a convenient means of transportation. But aside from that, your vehicle can help with your finances too. Because of its value, you can use your automobile as leverage for securing a loan.

Collateral loans can be a smart move for individuals who need money for a business goal or an unexpected expense. If you’re considering this loan, you can use your vehicle as collateral.

Here’s a quick guide to help you understand how it works and to help you gauge your chances of qualifying for a loan with your car as collateral.


Assess the Value of your Car

How much you can borrow will depend on the value of your collateral, which in this case is your car. It needs to have substantial worth to qualify as a guarantee for a loan. That’s why it’s important to have your vehicle’s market value assessed before anything else.

The automobile market typically changes from time to time, which makes assessing your car’s value a bit tricky and challenging. Fortunately, there are ways on how you can accurately know the current worth of your car. Here are two ways:

  • Take it to a local car dealership.

One of the best ways to determine the accurate value of your vehicle is to take it to a car dealership. Somebody from the company will gauge your car’s worth by conducting an inspection of your automobile and comparing it side by side with similar vehicles in the market.

If you have the time, you can take your car to different dealerships within your area. This way, you’ll have a more solid picture of the current market value of your vehicle.

  • Use online appraisal tools.

    Thanks to the World Wide Web, almost everything is accessible with just a click—just like appraisal tools for your car. If you’re schedule’s tight and you can’t find the time to drive to a car dealership, going this route works best for you.

    Online car appraisal tools determine the current value of your car based on the information you provide. Typically, these tools provide a questionnaire or form that will ask for details about your vehicle such as its model, make, mileage, engine, etc.

    When using an online car appraisal tool, you need to be as honest as possible to get the most accurate evaluation. Yes, your car is valuable and it may have a very deep sentimental value for you, but that’s not an excuse to put in false information to make it look better than it actually is.

There are several factors that influence the market value of your car. These include the make, model, mileage, engine, steering, transmission, and any added features like a customized sound system and power windows.

The overall condition of the vehicle is of utmost importance too. A car is considered in excellent condition if it didn’t require any paint touch-ups and any form of major repairs in the past. If the engine is clean and the vehicle has no traces of rust and any visible defect, you can expect a higher market value for it.

Calculate your Car’s Equity

If you’re still paying off a car loan, you can still use your vehicle as collateral if its equity meets the lender’s standards. You can calculate your car’s equity by subtracting the remainder of your car loan from the vehicle’s current market value.

Look for a Lender

Once you have an idea about the market value or equity of your car, it’s time to look for a lender.

For a start, you can ask for recommendations from your colleagues and loved ones. This will help narrow down your search. In most cases, your friends will recommend lenders or loan firms that they have borrowed from in the past. Their suggestions will be based from experience, so you can expect them to refer you to lenders whom they have a satisfactory transaction with.

Another way is to look lenders up online. Find ones that are near your area and look into the types of loans they offer. Do they accept cars as collateral? Learn about what people are saying about them as well. Any feedback or review will help you determine if a lender is worth your time and trust.

Once you have narrowed down your choices, list potential lenders down and start getting in touch with them. The first thing you need to determine is if they issue loans with cars as collaterals. Can they lend you the amount you need based on your car’s current value?

Inquire about their collateral loan requirements too. Do you need to undergo a credit score check? If your vehicle is still under a prior car loan, do you need to pay it off first before they can grant your loan application?

When you talk with potential lenders, let them know that you are diligent in comparison-shopping. This signals that you’re looking for the best deal and makes them more likely to negotiate and meet halfway with you.

Compare Offers

The most crucial part comes with evaluating the different offers from the lenders you talked with. At this point, you need to determine which deal makes the most sense for your needs and risk tolerance.

Understand the fine print. You can ask colleagues who are knowledgeable about loan and financial jargon to explain the terms clearly to you.

When going over different proposals, here are important details to take note of:

  • Annual Percentage Rate (APR) – It is an easy way to gauge the overall cost of the loan on an annual basis. The lower the APR, the more affordable the loan is.
  • Fees – A lender may charge fees for processing and documentation. You need to know how much they cost because it will have an implication to the overall cost of your loan.
  • Payment terms and interest rate – Is this fixed or variable? Are your required to pay the same monthly amount or will it change overtime?
  • Term – This refers to the period of time that you need to make payments for the loan. Can you pay the loan in time? Are you capable of making periodic payments over the course of the term?
  • Penalties – You may be required to pay an extra fee if you decide to settle the loan early. Determine how much the lender will charge if you want to get out of the loan ahead of time.

Don’t Hesitate to Negotiate

Collaterals provide an extra layer of security and assurance to the lender. Since that is the case, they tend to be more flexible when it comes to collateral loans. If there are areas within the offer that doesn’t sit so well with you, let the lender know and see if adjustments can be made for that particular clause. For instance, you can ask a lender not to impose a pre-payment penalty if you think that you can settle the loan in full before the term ends. This may or may not work, but keep in mind that lenders are more interested in getting their money back. So it’s worth trying to negotiate with them for something that they can benefit from as well.


Your car is a valuable possession that doesn’t just conveniently takes you from point a to point b, but also an asset that can benefit you financially. If you’re using it as collateral, take note of these pointers to find the right lender and get the best deal.