Fincar November 6, 2020 No Comments

If you’ve already gone through the process of paying off your car loan, you’ll be familiar with the fact that it can sometimes be more difficult than expected to manage your finances. But if you’ve made it through the ordeal successfully, or found yourself to be coping well so far, you might already be looking ahead to your next major purchase. In that case, with an asset under your belt, you might consider using your car as collateral for a new loan. Is it a sensible thing to do? What sort of complications can you run into? Let’s discuss.


How does it work?

Just as it would be if you had a house to your name, the equity you have accumulated from a vehicle may be put up as collateral for new finance. This means that your car is an asset that is secured against that other loan, so if you were to fall behind on repayments, it could be seized to contribute towards the balance of the outstanding debt. Ultimately, you should assess that risk.

One thing you should be conscious of, before you start the process, is how the most recent car loan has impacted your overall credit history. Because even if you manage to pay down the loan in full, and the car transfers fully to your name, if there were instances of missed payments or other indiscretions along the way, it could be unwise to apply for another line of credit until you have ‘repaired’ your credit history.


What other considerations should I take into account?

Beyond the risks of repossession and damaging your credit history, you should take into consideration your overall ability to repay the loan. The best way to assess this is by budgeting meticulously, measuring all your income and expenses in detail. You may even need to include a higher standard of insurance coverage into your calculations, since the financier for your next loan will want to ensure there is adequate coverage of the asset they have claim over.

While we have largely focused on a car that has been fully paid off, if the car loan is still in the midst of repayment, it really isn’t an ideal proposition to put yourself in. First of all, there would need to be sufficient equity built up, which isn’t always the case with lower value cars. On top of that, the outstanding debt would need to be less than the value of the car. All in all, debt mounting on top of debt could backfire if you found yourself in an unexpected financial position, such as losing your primary source of income. Never disregard planning for unfortunate outcomes like this.


The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.