How to Borrow Using Your Car

Unfortunately, life can throw unexpected financial emergencies and if money management is not your strong point or you have been unable to save up an emergency fund, these unexpected expenses can make you struggle. When this happens, many individuals turn towards loans to solve the issue.

Canadians who do not have a solid financial history, income, or excellent credit score, unsecured loans from a bank or other financial institution are off the table.  A smart option is to obtain a collateral loan (secured loan), as these do not use your financial history during the approval process but instead look at your present situation.


What is a Collateral Loan?

A collateral loan is a secured loan that requires the borrower to put up an asset of value to illustrate that they are serious about paying the loan back. Essentially, a collateral loan gives the lender confidence that if you do default on the loan, they can use the asset to recoup their money back.

The most common types of collateral loans that you see in Canada are home mortgage loans, car title loans, and auto equity loans. Here is a breakdown of how you can use your car as collateral to get a loan.

Auto Title Loan

This is also known as a car title loan or an auto title loan and typically has high-interest rates due to how easy they are to obtain. These types of loans require you to be the sole owner of your vehicle, have the vehicle completely paid off, and have no other liens against the car. If you meet these requirements, you can take the title of the car into an auto loan company and walk out with a cash. Information that you will need for this type of loan is employment proof, your full name and physical address, and the make, model, and year of your vehicle as well as the physical title itself. The main issues with this type of loan are that your vehicle can be repossessed if you do not repay the loan within the payment period and the loan has high-interest rates.

Auto Refinance

This is an option for those who want to use the value of their vehicle as collateral but still have money owing on the car. This can be a relatively expensive route to take though as refinancing your original auto loan means that the new loan will be at a higher amount in order for you to pocket the extra cash. If you choose to refinance your original loan, you may need to qualify for refinancing if interest rates have changed or your credit score has fluctuated.

What to Keep in Mind When Borrowing Money Against Your Car

Unfortunately, car title loans and refinancing options can be extremely dangerous to the borrower if they are not completed right or if terms are not followed correctly. When it comes to car title loans, the interest rates are generally pretty high. Losing your vehicle can put you in an extremely tough position if you use that vehicle to get to work or complete daily activities like picking your child up from a school or getting groceries.

With this said, if you have to use your vehicle as collateral, it is generally a good idea to refinance it. This way, your payments will be sent to a financial institution, which may be more forgiving, if you are late on these payments or miss one due to an emergency. Financial institutions may also be more generous in giving you a longer repayment period, which can make the situation a lot safer for all parties involved. 

When possible, if you do take a car title loan, it is extremely not get dragged into a cycle of debt by “rolling” the debt over. Rolling the debt over will cause a compounding effect of higher interest rates, which can be extremely tough to get out of.

Despite the risks of losing a vehicle or being caught in a debt wheel, car title loans are actually quite popular. Luckily, for those who do not want to take the risks associated with using a car as collateral, there are other alternatives available. Try borrowing money from a family member or finding a second job temporarily.

What should I do?

The general advice here is that if you have to take a loan with your car as collateral, make sure you understand the terms and conditions of the loan and figure out whether it is the best route for you to choose.