Auto-backed Loan
A paid-off vehicle can be used as collateral to borrow at lower finance rates and pay off higher-interest loans through a secured personal loan or auto equity loan. This is different from a car title loan, which should generally be avoided as it is risky and expensive.
Pros
Lower interest rate
Secured loans are lower risk to the lender.
Increased approval odds
Lenders assume less risk on a secure loan.
Quick loan processing
Often funds are transferred the same day you apply.
Flexible terms
Equity loans come in a variety of rates and term lengths.
Cons
Risk of repossession
If you default on your payments, the lender may repossess your vehicle to pay on the loan, which can also damage your credit.
Eligibility requirements
Not all vehicles qualify to secure a loan. Your car must meet lender requirements.
Negative equity
Vehicle depreciation can work against you if you have a longer payback period. You may owe more than the car is worth.
Limited borrowing capacity
Your loan will be limited to a certain amount of your vehicle’s equity.
Full insurance coverage requirement
Most lenders will require you to have full coverage on your auto insurance, similar to a regular auto loan.