Approval of a loan application is subject to certain conditions. In addition to the applicant’s creditworthiness (solvency), this also includes the Credit Bureau information. If this turns out negative for various reasons, it will be difficult to get a loan.
What is a car loan as security?
This is a special form of an installment loan. Since this type of loan provides the bank with a security, namely the car, its approval is subject to less stringent conditions than a private installment loan. Of course, not every car is accepted as security by the financial institution. Only high-quality vehicles such as new cars from the upper middle class or possibly still vintage cars with a certificate are suitable for this.
How does a car loan work as security?
Unlike other personal loans, which are mostly approved for free use by the borrower, this special form of loan is often earmarked. It is often used to finance a car. The banks of the major automakers in particular have specialized in car loans as collateral. The vehicle letter remains with the bank as security and is only handed over to the owner of the vehicle when the loan has been repaid in full.
In return, the borrower benefits from particularly favorable conditions such as low interest rates. The criteria for granting a car loan as collateral are also not as strictly applied as with ordinary personal loans. Nevertheless, the basic conditions, such as sufficient creditworthiness, must of course exist. If the borrower can no longer pay the installments of the loan, the bank can keep the vehicle financed as a deposit in order to guarantee the repayment of the loan.
However, such events are relatively rare. The risk can be covered with residual debt insurance. Whether it is worth taking out such insurance depends on the individual circumstances of the borrower. Since a loan with a car as collateral is larger amounts, advice from independent financial experts is recommended.