Would using an expensive car as collateral for a small loan to get cheap parking work?

Question

There's a rather old joke which is being told in many variations and my question would be whether events narrated could actually happen in real life. I'm not in the US so I don't know all the details of how banks work in the US.

The joke goes something like this:

A person enters a bank in a large city (typically New York) and asks if he can get a rather small loan (perhaps one thousand USD). The bank clerk asks for a collateral and the person offers his expensive car (worth some hundred thousands USD). Every bank employee thinks the person is insane (or dumb in some joke variations) offering such an expensive collateral for such a small loan yet the person insists this deal is okay with him. So he signs all the paperwork, drives his expensive car into the bank's garage, gets the loan and leaves. A month later he gets back, repays the loan, pays some small amount of interest (perhaps one hundred USD), gets his car back and drives away. Turns out he just wanted to have his car parked in some safe place and with this trick he had his expensive car parked and safe for a whole month and the cost was very cheap for him.

(end of joke)

Would this work in the real life?

Answer 1

I've never heard of a bank taking possession of collateral at loan issuing, they just obtain a legal right to use the collateral to satisfy the debt in case of default.

Pawnshops/pawnbrokers on the other hand do take collateral up front, and there are auto pawnbrokers, I doubt it would be economical, but you could certainly pawn your car for 30 days and have it be stored safely.

Answer 2

The joke has several flaws.

1. The bank would likely not accept a $100,000 car as collateral on a $1,000 loan. If the bank ever needed to collect on the debt, that would get messy fast. A bank can't take more then what it's owed plus fees and interest. They would have to hunt you down for the other $89,000.

2. The bank would not need collateral for such a small loan. At least not like that. a $1,000 loan (or other small amount) falls in the category of a "personal loan" and either they would secure it with cash from your bank account, or trust you because of your credit rating. They may issue a credit card, or all kinds of other products to get you your $1,000 in credit, but not an auto loan.

3. The bank would not "take" your car for the length of the loan. In fact they won't want anything to do with it. They wouldn't want the risk. If they needed to collect they would just go pickup the car. If you have an auto loan, you have to add the bank to the title, so they already have some rights to the car.

4. Pawnshops, which are like old school banks and despite a bad rep can be quite awesome would also not be interested. To much risk for too little reward. The interest they would make on $1,000 would be to small to have to insure a $100,000 purchase.

Answer 3

It wouldn't work, because if the bank had a space for storing cars used as collateral, they wouldn't be blind to the fact that it's a form of parking, for which they would charge the market parking rate to the loan account.

Banks charge for every darn thing they can, and regard any concession as a rebate.

So, that is to say, the bank might have a procedure in place, for sufficiently highly valued loans collaterized by cars, to reverse the parking charges. The parking fee might still appear on the account, but immediately followed by a reversed charge, just to make it clear that there is a parking fee that the bank is covering with a rebate.

In my own personal bank account, I see a service charge every month which is immediately reversed with its negative equivalent; that's to remind me that the product isn't free; I'm just getting a break as a "long-time, valued customer".

Actually the fellow in the joke isn't as clever as he thinks he is. The situation of extremely cheap parking is in fact a case of arbitrage. What he should be doing is advertizing that, as a joint venture with a major bank, he has a great deal for providing a low-priced parking spot for a month for a luxury vehicle in the bank's secured lot. Then effectively borrow someone else's vehicle, get the loan with that vehicle as collaterial, charge the owner the advertized rate for parking (still a bit lower than market), and pocket the difference. Needless to say, the clever arbitrager also doesn't engage in anything so financially reckless as actually owning a luxury vehicle.

Answer 4

As Hart CO mentioned, it seems like it would be possible to pawn a car for 30 days to have it stored safely. This may not be a wise idea, though. Remember, the reason you have to hand over collateral is so that the lender can take ownership of the collateral in the event that you default on your loan. Since this is a wealthy person with a fancy car, we can assume that he'll have the money to pay off the loan when he gets back, but that assumes things don't go wrong in the mean time.

One can imagine plenty of things that could cause someone to default on their loan despite having the money to pay it back. Suppose you sustain a serious injury toward the end of your month-long trip and are rendered unconscious. By the time you wake up in the hospital two weeks later, your car has been sold and all you're left with is the measly $1000 you borrowed and a red mark on your credit score. Maybe your flight will be canceled and you'll be stranded somewhere without phone or internet access to tell someone to go pay your loan off.

Of course, you have to balance the likelihood of something like this happening vs. the likelihood of your car being stolen or damaged if you park it somewhere less secure or the cost of paying a higher price for a real parking spot. Still, if I had a $100,000 car I wouldn't sign anything that put me in a situation where one unlucky event could result in my car being owned by someone else.