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A vehicle is the second-largest asset most people own. The buyer might need a loan to purchase it, or the owner might take out a loan on the vehicle to get cash. The vehicle itself serves as collateral in both cases. Interest rates and terms on vehicle collateral loans vary depending on your credit and income, and on the value of the vehicle.
Direct Lending for Purchase
Lenders make direct loans that allow customers to purchase new or used vehicles. The customer comes to the bank in person or online to apply directly for a loan. Funding from the bank usually is in the form of a check to the seller of the vehicle. In exchange for this loan, the lender requires a lien on the title of the vehicle. In most cases, the lender keeps the title to prevent the owner of the car from selling it without the loan being paid in full.
Dealership Financing for Purchase
Dealership financing is a convenient alternative for many buyers, who can purchase the vehicle and obtain financing at the same location. The car dealer takes the application from the buyer and checks the buyer's credit to see whether it meets the criteria for a loan. The dealer can then keep the contract and collect the payments, but it usually sells the contract to a lender who collects the interest and payments. The dealer transfers the security interest in the vehicle to the purchasing lender, as it retains the title as collateral for the loan.
Bank or Credit Union Title Loans
If you don't owe money on your car, or if you have a reasonable amount of equity in the vehicle and your credit is good and you have a regular source of income, you can probably obtain a loan using your vehicle as collateral. You can use this cash from a bank or credit union for any purpose that you want. The lender will need the title of your vehicle as collateral for the loan. The interest rates on these loans are usually reasonable, and so are the loan-to-value ratios.
Title lenders specialize in lending money to people with poor credit or questionable income sources, using their vehicles as collateral. Because of the higher risk, these lenders might only lend a small percentage of the vehicle's value, often 33 percent. The interest rates on these loans tend to be high, sometimes as much as 300 percent annually. These title loans often need to be paid back within 30 days. If you can't repay this loan, you'll either lose your vehicle or you'll need to renew the loan and pay additional interest.
If you seek a title loan on your car because you're in a difficult financial position, your money problems might become worse. The high interest charges can strain your finances and make repayment difficult, particularly if you roll over the loan for several months before paying it off. And if the lender repossesses your car because you can't pay, you might have a difficult time getting to work, adding to your financial problems.