5 Types of Assets to Use as Collateral for Secured Auto Loans

Secured auto loans use a collateral in order to reduce the cost of financing to the borrower and to reduce the risk of financing to the lender. On the whole, this exchange is mutually beneficial for lenders and borrowers. However, it is only truly an option if you have collateral to use in order to secure the loan. Luckily, every person purchasing a car will have an immediate source of loan collateral. 

1 -New Car

The immediate source of collateral all auto borrowers have is the new car they are purchasing. Instead of taking over the title from the seller, the borrower can turn over the title immediately to the lender. This is most easily achieved when you are taking a loan direct from the dealer. The dealer will not furnish the car title to you until you have paid off the loan.

2 - Existing Vehicle

If you have a two-car household or another type of vehicle, it can be used as collateral for the loan on another car. This is a better option for a person who owns another car outright with no outstanding loan balance on the separate vehicle. You should realize, though, the entire loan based on the value of your existing car may not be enough to cover the whole purchase of a new car; you will need to cover the difference in cash in this case.

3 - Home Equity

Tapping your home equity to buy a car is extremely risky. This option should only be pursued if other options are not available. Further, you should aim for a very low loan limit to avoid taking on too much debt in your current property. Homes that are over-collateralized are the most common sources of foreclosures and bankruptcies for even high income households.

4 - Stock Certificates

Using a stock certificate as collateral is a beneficial alternative option. While your lender holds on to your certificate, the stock continues to earn interest, which in effect lowers the interest rate on the loan. Your investments are not sacrificed in order to cover the short-term cost of the automobile. If you default, you are losing an investment, but you will be able to keep your home, car and other necessities in the short-term, minimizing the chance of a catastrophic financial failure.

5 - Savings Account

Similar to using a stock certificate as collateral, using a savings account or CD allows you to earn interest on the money while you are paying off the loan. Instead of liquidating your savings, you can take a loan against the savings. You will have to have the savings account on hold with the bank where you are taking the loan. This is only an option for a person who has the cash on hand to purchase the car out right but would rather not totally drain a savings account to do so. You can still spend money from your savings account while it is being used as collateral, but you will have to repay the funds within a narrow window to maintain a minimum balance.

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