WAlthough auto equity loans are not very common, they allow you to borrow against the equity in your car. Your equity is the difference between your car loan balance and the current value of your car. If you have equity in your car and need to borrow money, this might be an option worth pursuing.
We’ll walk you through how auto equity loans work to help you decide if this type of personal loan is made for you.
How Auto Equity Loans Work
When you take out an auto equity loan, your lender offers you a loan based on your car equity. If you have paid off your car loan and owe it for free, your equity would be equal to the current market value of the car. However, if you still owe money on your loan, your equity would equal the current value of the car minus your loan balance.
For example, if the car is worth $ 20,000 and you owe $ 5,000 on it, you have $ 15,000 in equity ($ 20,000 – $ 5,000).
However, each lender sets their own rules for the maximum amount you can borrow. Some will allow you to borrow all of your equity (like the $ 15,000 in the previous example) while others offer loans up to 125% of your equity, which would equal $ 18,750 in this case ($ 15,000 x 125%)
When is an auto equity loan the right choice?
A car loan can be a good option if:
- Looking for lower interest rates.
- You have a fair amount of equity built up in your car.
- You are struggling to qualify for other traditional loans.
- You are certain that you can afford the loan so that you do not risk repossessing your car.
How to get an auto equity loan
Getting a car loan is a little different from apply for a personal loan. While lenders can set their own rules for the application process, here are some general guidelines you can follow:
- Make sure you have equity: If you have no equity in your car, you will not be eligible for an auto equity loan. To calculate your car’s equity, subtract your remaining car loan amount from the value of your car (as determined by Kelley Blue Book or a similar resource).
- Find a lender: Auto equity loans are not that common, especially at big banks. Your best bet is to check with local credit unions and your current auto lender (if you still have a loan).
- Apply for a loan: Aside from normal details like your income and credit score, lenders will want to know the details of your car so that they can establish its value. They will also want to see the details of any auto loans you have so they can calculate and verify your equity.
- Repay your loan: If you are approved, congratulations! Remember to make all your payments on time. You can sign up for automatic payment so you don’t miss any payments.
Auto equity loans vs. auto title loans
Auto equity loans and auto title loans are loans based on the amount of equity you have in your car. Lenders are also likely to ask you to offer your title as collateral until you pay off either type of loan.
However, auto title loans tend to be riskier. They charge very high prices, even on par with payday loans. These high fees can make it difficult to meet your repayment obligations and cause the lender to foreclose on your car. For example, according to the Bureau of Consumer Financial Protection, about 20% of auto loan borrowers have their car repossessed.
Auto title loans also tend to be short term loans, usually a month or less. Auto equity loans, on the other hand, can last for months or years, just like a traditional auto loan.
If you choose between the two, we recommend that you stick with auto equity loans.
Benefits of auto equity loans
- Offer low rates: Auto equity loans are secured, which means your car serves as collateral and lenders can repossess it if you don’t pay. Because the collateral makes these loans less risky, the lenders offer lower rates.
- Approvals can be easier: Again, since auto equity loans are less risky for lenders, it may be easier to get a unsecured loan, which is based solely on your credit and financial situation.
- You don’t need to own: The other type of equity loan is a home equity loan, but not everyone owns it.
Disadvantages of Auto Equity Loans
- This can mean working with multiple lenders: If you get an auto equity loan from a different lender than your primary lender (if you’re still paying off the car), it can complicate things. You will have two loans to pay, manage and follow.
- You can potentially lose your car: Because these are secured loans and your car serves as collateral, you can lose your car if you default on your payment or default on your loan.
- They are not widely available: You might have difficulty finding a lender for an auto loan. They tend to be more common in credit unions, but you may not be eligible to join depending on their membership terms.
Alternatives to auto equity loans
The good news is that in addition to auto equity loans, you have many options for borrowing money if you are in a rush, including:
- Home equity loans. If you are an owner, you can access your home equity, similar to an auto equity loan. Since mortgages are much larger than auto loans, you may be able to borrow more money with a home equity loan.
- Personal loans. Personal loans are a great option if you need funds to cover a variety of expenses, including medical bills, emergencies, or home improvement projects. There is even bad credit personal loans available, and although their rates may be higher than traditional personal loans, they are much lower than payday loans.
- Credit card. Credit card are versatile tools that let you borrow money as needed up to your credit limit. You are supposed to pay off your balance every month and any outstanding balance will start earning interest.
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