How they work, cost, alternatives
- Car loans use your car as collateral, which means the lender can get your car back if you don’t pay.
- Loans often have to be repaid within 15 to 30 days and the interest rate is around 300%.
- Alternatives to secured loans include credit cards, personal loans, side events, and local charities.
A secured loan is a short-term loan with a high interest rate that uses the car’s title as security when you borrow money. This means that the lender can get your car back if you don’t pay the loan back on time. Many lenders do not consider your credit history when making credit decisions.
If you are in a difficult situation, have poor credit and need money quickly, a secured loan may seem like an attractive option to get cash. But secured loans have serious drawbacks. Secured loans are risky as they charge high fees and you risk losing your car if you fall behind with your payments.
Lenders typically target borrowers with a low credit score or minimum credit history who may not be eligible for lower cost loans elsewhere.
“In an ideal world, no one would take out a loan against collateral,” he says Evan Gorenflo. Senior Financial Advisor with Albert Personal Finance Application. “It’s not something you usually associate with progress or a financial goal. It’s more designed to help you in a desperate time. “
What is the cost of a secured loan?
Loans typically have an interest rate of 200% to 300% APR. A real estate loan usually has a better interest rate than a payday loan, which can have an APR of 400% or more. However, its rate is much higher than that of personal loans or credit cards, which usually have a maximum APR of around 36%.
“Car loans are difficult because a lot of people rely on their car to earn money,” says Gorenflo. “In this situation, you relinquish the title as security. Sometimes you give them a second set of car keys, in some cases they put the GPS in the car, so you make it very easy for them to confiscate the car if you can’t pay it back. “
How much can you borrow with a real estate loan?
The amount you can borrow depends on your individual circumstances, but generally lenders allow you to borrow from $ 100 to $ 10,000. The usual loan length is from two weeks to one month, similar to payday loans.
“There is a limit to how much you can borrow,” says Gorenflo. “If your car is worth $ 10,000, they won’t let you borrow it all. Sometimes it is 25% of the limit, no matter what your capital is. secured loan. Each lender will act a little differently. “
Pros and cons of secured loans
What are the alternatives to secured loans?
If you need money to pay off expenses such as utility bills, credit card payments, or rent, try contacting your creditors to establish non-loan repayment plans. You never know what options may be available to you, unless you get in touch and ask.
Other alternatives to mortgage loans include asking friends for money, taking extra appearances on ridesharing apps, or contacting local charities or religious organizations. If you qualify, you may want to take a credit card or personal loan with a lower APRC than the secured loan. You will still borrow money, but it will cost less in the general interest.
“If you need quick money, if you need to make 200 bucks, you can do it over the weekend with Uber,” says Gorenflo. “Even if your car is a bit more worn, if you avoid taking out a loan at 300%, it can definitely be worth it.”