Car is one of the best collateral for a loan because: Car has very high liquidity. You can usually sell your car within a few days no matter what.
What is collateral?
The term "collateral" means "security for a debt". Collateral is something you have that can be sold if you don't pay back the loan.
For example, if you have a house and you have it as collateral for a car loan, you could lose your home if you don't pay back the loan. However, if you don't sell the house, the bank cannot force you to pay back the loan. This gives you a "safety net" of sorts.
It's like having an umbrella when it rains. An umbrella protects you from getting wet but it doesn't force the sun to stop shining on you.
Why to use car as collateral?
Car is one of the best collateral for a loan because: Car has very high liquidity. You can usually sell your car within a few days no matter what.
Banks use often car as collateral because of its high liquidity. After all, if they don't sell the car right away, they might be forced to hold it for a long time and this makes them lose money. Selling it right away is in their interest.
Loans with car as collateral can provide you higher amount of available loan and lower interest.
Difference between loans without and with car collateral
There is one biggest difference between loans WITH and WITHOUT using car as collateral:
Loan with NO car collateral: If you miss a payment, the bank can seize your car and sell it to pay back the debt. This will cause you great inconvenience and possible financial disaster.
Loan WITH car collateral: If the bank tries to take your car away, you can always sell it to pay back the debt. This gives you a "safety net" and provides you with much higher amount of available loan.
What is a "balloon payment"?
"Balloon payment" is a type of payment when you make a big payment towards the end of the loan instead of regular payments. Why do they do this? The reason is simple. If you make regular payments, your debt will be paid off much faster but the interest that will be charged on the debt will be much higher.
Conclusion
Using car as collateral for a car loan is one of the best ideas you can have. It gives you much higher amount of available loan and lower interest rate. It also gives you extra protection against financial disaster.
