Money Management

Credit Security On Four Wheels: The Car Pledge

Many people are not aware that they have the credit protection that would be sufficient even for starting a small business: their own car. The reason why many people are not yet aware of this: banks do not recognise a vehicle as collateral. The problem is as old as credit itself: Those who have standard bank collateral basically do not need credit. Those who need a loan often do not have the usual bank securities. Escaping this vicious circle is not easy. But there is a remedy.

If you cannot get a loan from the bank because your credit rating is not good enough, you will usually turn to your private environment. And that is where the next vicious circle begins: People who have friends or family members who are so well-off that they could help them out with a personal loan usually have enough money of their own or have the usual bank credit rating. Unfortunately, in most cases it turns out that the financial possibilities in the circle of acquaintances or family are more or less the same as one’s own. Therefore, no help can usually be expected from this side either.

An alternative that has recently developed is credit portals. Loan seekers register their needs on these portals, and many small lenders jointly provide the desired amount – if everything goes well. The problem here is that credit platforms also usually carry out a credit check, and this is similar to that carried out by banks. Even if you make it through the credit check, lending is not yet dry. Lenders often evaluate the loan application very subjectively. In other words, they must “like” the loan application in order for them to support it. This often turns the loan application into a game of chance.

Back to the beginning. Basically, there is a high-quality loan collateral: your own vehicle. Too bad that neither banks, friends nor credit portals recognise this. This is where a new player enters the stage: the pawn shop. These useful facilities evaluate and lend items – without any credit assessment, without any proof of income, without any credit investigation. Until now, however, there has been one disadvantage: regular pawn shops are overstrained with the lending of high quality items. Their business area is in the two to three digit range, sometimes even in the four digit range. This circumstance was the reason for the birth of the car pawn shops.

Car pawn – what is that actually?

Car pawnbrokers close the gap in the credit supply for people seeking credit in the middle credit range with a low credit rating. The car deposit is a deposit business like any other, but in the higher value range. And a deposit business is basically nothing more than a lending transaction – a fact that many people are not aware of.

If desired, the loan by car pawn can take place very quickly. The vehicle is driven up, valued by the pawn shop, the pawn credit agreement is signed, the amount is paid out against the handover of the car papers – finished. In rare cases it can happen that the pawn shop takes some time for the technical evaluation, but even in this case the disbursement is much faster than when the bank grants the loan.

Car deposit

A loan through the car deposit system has some considerable advantages. The most important one is of course – as already mentioned – the independence from the own credit rating. The rating of the Experian does not play a role, nor does the amount of the current income. The statement of assets can stay in the cupboard. All that counts is the vehicle, its current value and its technical and optical condition. Only these values decide on the granting of credit. Added to this is the rapid processing and disbursement.

One aspect that speaks for the loan by car deposit has not yet been discussed: the variable term. While bank loans – but also private loans – usually have a fixed term, the borrower decides when the time for repayment has come – of course within the agreed deposit period. Early repayment is excluded with many conventional loan agreements or is associated with considerable additional costs. Not so with the car deposit. Here the borrower decides when the time has come – without any deductions.

Credit without creditworthiness requires independent action

In order for the loan by car collateral to be an all-round positive experience for the borrower, some honest considerations are required on his side before he takes this step.

The possibility of taking out a mortgage loan without a credit check and proof of income is a great opportunity to implement personal plans and achieve goals. But it also requires an open and honest assessment of the personal situation – a self-initiated credit check on one’s own behalf, so to speak.

Even if your own income or assets are not proven, they must still be available at the time of repayment – at least if you ever want to see your car again. In other words, there must be a concrete and realistic plan for the repayment. Therefore, any loan applicant who wants to provide his vehicle as collateral should first ask himself these questions:

  • Am I able to repay the loan?
  • When will the repayment date be?

If there is a satisfactory answer to both questions, there is nothing to stop the car pawn. Particularly when it comes to the question of whether repayment is possible within a few months, the credit seeker should not indulge in wishful thinking of the kind “it will work out somehow”. There must be concrete indications that the possibilities for repayment are given. This can either be a new job with a reasonable salary, or the prospect of a larger income, for example an inheritance or severance pay.

This is the characteristic of a loan by car deposit. It is not a gift from heaven that makes money flutter in your lap, which a higher power then takes care of paying back. It is a bridging measure in case of a liquidity bottleneck until the income that makes repayment possible arrives.

A matter of minutes

As mentioned at the beginning, the lending and cash disbursement is processed in the shortest possible time. Only rarely is more than an hour required, usually less. This is how the process works:

  • Step one: The loan applicant drives his vehicle to the car pawn shop.
  • Step two: The vehicle is checked and evaluated.
  • Step three: The car pawnbroker suggests a loan amount.
  • Step four: The pawn credit agreement is signed.
  • Step five: The loan is paid out to the borrower.

Another advantage of car pawning is the transparency of pricing. In principle, the current value of the presented car is used. A discount is deducted from this as security. This can look like this, for example: The current value of the vehicle is 20,000 GBP . After deducting the security discount of 7,000 GBP  (example value), the loan payout is 13,000 GBP . This amount is then used to draw up the pawnbroking contract, which also contains the other conditions, such as interest, fees and the pawning period. The possibility of releasing the vehicle before the end of the deposit period is also part of the pawn loan contract.

A look at the disadvantages

As with all interesting things, there are also some disadvantages with the deposit or the car deposit, which should not be left out of sight in the overall evaluation. The most obvious one is the credit cost. A loan to a borrower with a low credit rating naturally represents an increased risk for the lender, which must be compensated financially. The difference to a regular bank loan lies in the acceptance threshold. This refers to the threshold above which the lender no longer considers the granting of credit to be acceptable and rejects the loan, even if the cost of credit is higher.

Anyone who has ever tried to obtain a bank loan with a low credit rating knows that the acceptance threshold at banks is set extremely low. Even if the credit rating is slightly lower, the bank is not prepared to grant the loan, not even with increased credit costs. This is the big difference to car collateral, where an acceptance threshold is virtually non-existent.

What remains, however, is the risk assessment that even a car pawnbroker must carry out in order to avoid getting into trouble. As a result, car loans involve higher credit costs than are usual for a bank loan. This is not necessarily reflected in the interest rates, which are currently relatively low for car loans. What makes a noticeable difference is the deposit fee, which in most cases is charged additionally. It usually amounts to between two and three percent – per month. A bank loan costs about the same, but per year.

The credit seeker should be aware of the magnitude by means of a concrete example, before the final decision is missing. For example, a loan of 10,000 GBP  over six months and a deposit fee of three percent will cost 1,800 GBP  for this alone – in addition to the interest on the deposit loan.

The second major disadvantage is the loss of the vehicle during the pledge. With the classic car pawn, the borrower has no access to the car – it is safely stored in the car pawn shop. If the borrower’s lifestyle or occupation cannot be realised with alternative means of transport, the pledging of his or her own vehicle is likely to cause serious problems. In most cases, the temporary change to public transport, the bicycle or the scooter works. But if not, there are few alternatives. This leads to one obvious fact: If you cannot do without your vehicle, you have to say goodbye to the car pawning credit option – or maybe not.

Pledge a car and still continue using it – is that possible?

Increasingly, an alternative form of car pawning is becoming established, which is offered by a growing number of car pawn shops: the car pawn with the option of continuing to use the car.

From a legal point of view, this is not a car pawning transaction. Rather, the credit seeker sells his vehicle to the car pawnbroker and then rents it back. In this way, it is possible to disburse the proceeds of the sale in the amount of the desired loan amount, and yet the seller still has the vehicle at his disposal. As a rule, this solution is noticeably more expensive than the classic car pawn, as it also includes the fee for the continuous use of the vehicle. Nevertheless, this variant can prove to be the ideal solution in special life situations – for example, when a business has started up but the indispensable vehicle is the only loan collateral.

Skillful timing – the alternative to continuing to drive

In many cases, the right timing can solve the problem of unavailable vehicles in a clever way. If it is not a question of a current credit need that requires payment within a very short time, time management can serve as a problem solver. Here are two examples:

The summer solution

Loan seekers who miss their vehicle especially in the cold season, while in the warm season it is no problem for them to take the scooter once in a while, should set the pledge date to spring. This way, there is enough time in summer to ensure timely repayment and to have the well-heated car available again in time for the beginning of winter.

The winter solution

This variant is particularly suitable for owners of a seasonal vehicle such as a motorcycle. In this way, the bike can be pawned in the exact period in which it would have been deregistered and parked unused anyway. It can then be released again in time for the first trip out in spring.

Conclusion on car deposit

The Autopfand is the ideal loan solution for people with low creditworthiness or for borrowers who value very fast processing and payout. Although the costs are higher than for regular bank loans, this alternative is clearly better than having to do without important projects altogether. The disadvantage of not being able to use the vehicle while it is pledged can be avoided with a continuation option. Even if the pledge is planned in good time, it can compensate for the loss of use in whole or in part.

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