What Is an Auto Equity Loan?

If you own a car and need cash right away, an auto equity loan can be a better option than an auto title loan or a payday loan. You can borrow against the value of your car for any reason, even if it’s not fully paid off. An auto equity loan is a type of secured personal loan that may offer you a lower interest rate than other loan options.

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What is an auto equity loan?

An auto equity loan allows you to borrow money based on the equity you have in your car, which is your car’s value minus the amount you still owe on it. This loan won’t impact your original car loan.

If your car is worth $15,000, and you still owe $10,000 on it, you can borrow against $5,000 in equity. If the car was fully paid off, then you could borrow against the entire value of the car.

Each lender sets its own rules for an auto equity loan. You can find lenders willing to loan up to 125% of the equity. If you had $5,000 in equity, you may be able to borrow up to 125% or $6,250. Some lenders limit the age or mileage of the vehicle they will accept for an auto equity loan, and these factors can also impact your loan terms.

A car equity loan term can last anywhere from several months to a few years, like a normal auto loan.

Auto equity loan vs. auto title loan

Both loans let you borrow against the value of your car, but neither is a great option. One difference between an auto equity loan and an auto title loan is that the original loan usually needs to be repaid before you can take on a title loan. Title loans are also usually for smaller amounts, commonly 25% to 50% of the car’s value.

Title loans typically have incredibly high interest rates – as much as 300% – which make them difficult to repay. Like payday loans, they have shorter terms of only two to four weeks. Many borrowers are unable to repay the full amount in such a short window and have to borrow another car title loan to repay the first, becoming trapped in a cycle of debt.

When is an auto equity loan a good choice?

An auto equity loan might be a good choice if:

  You need cash quickly

  You have equity built up in your car

  You can afford the payments on both the equity loan and the original financing

  You’ll get a much lower interest rate than you would with an unsecured loan

  You can’t qualify for other, less risky financing

How to get an auto equity loan

The application process for an auto equity loan is similar to other types of loans. You’ll need to supply information about your car and any existing financing. The lender will make the final determination on what your car is worth and how much you can borrow.

• Calculate your car equity. Use online resources like Kelley Blue Book or J.D. Power to determine your car’s value. Compare that projected value to your existing loan balance to understand how much you may be able to borrow.
• Check your credit score. Use a free credit score service or your bank or credit union to see your credit score. Your credit score will play a big part in the loan rates you’ll be offered.
• Compare lenders. Use online applications to receive auto loan offers from multiple lenders. Shopping around for the best rates and terms can help you save money over the life of your loan. Remember, not all lenders offer auto equity loans.
• Apply for a loan. Select the lender that best meets your needs and finalize the loan application. You’ll need to provide personal and financial information, plus information about your car and any current financing.

Pros and cons of an auto equity loan

An auto equity loan can be a way to get money fast if you have an emergency, and may be easier to get than a personal loan or a credit card. Be sure to understand the pros and cons of an auto equity loan before you sign on the dotted line.

Pros

  Low APRs: Because your car serves as collateral, the auto equity loan will likely have a lower APR than an unsecured personal loan or a credit card.

  Long terms: You may be able to get an auto equity loan with long loan terms of up to 84 or even 144 months.

  Easy to qualify: The loan-to-value (LTV) ratio of your car will determine how much you can borrow. While your credit history is still an important factor, it’s generally easier to qualify for a secured form of financing like an auto equity loan.

  Quick access to cash: If you apply for an auto equity loan online and sign up for direct deposit of the loan funds, you could be approved within one business day.

Cons

  Possible car repossession: If you don’t make the payments, your car could be repossessed and sold. A car repossession will negatively affect your credit score and your ability to borrow money in the future.

  More debt: Taking on additional debt should always be approached with caution. While sometimes debt is necessary, adding another monthly loan payment could strain your budget.

  Full coverage insurance required: Most lenders require collision and comprehensive insurance coverage with a low deductible. If you’ve paid off the car, you might not already have the required insurance.

  Hard to find: It can be hard to find an auto equity loan lender. Check with credit unions and small banks in your area.

Alternatives to auto equity loans

An auto equity loan is usually a better alternative than a title loan or a payday loan. However, consider other types of credit before you take out an auto equity loan.

• Cash-out auto refinance: Like an auto equity loan, you may be able to borrow up to 125% of your car’s equity. But with a cash-out auto refinance loan, you pay off the original loan and keep the rest for yourself. This way, you only have one loan instead of two.
• Auto title loans: Title loans are a last-ditch option if you need cash fast and have no other resources. Be sure you have a firm plan to pay it off before you take out the loan. Remember, your car usually needs to be fully paid off to take a title loan.
• Personal loans: An unsecured personal loan may have a higher interest rate, but you don’t put your car at risk of repossession. Lenders typically require good credit or better because the loan isn’t backed by collateral, but there are lenders that offer personal loans for bad credit.
• Home equity loans: You may be able to borrow more money and pay less in interest with a home equity loan than an auto equity loan. However, if you can’t make your payments, you risk losing your home.
• Credit cards: If you need money fast, you can apply for or use a credit card to cover an emergency expense. The interest rate on credit cards can be 20% or higher, but if you have strong credit, you may qualify for a card with an introductory 0% APR period.
• Trade in or sell your car: Sell your car on Craigslist or another online marketplace and use the leftover cash for whatever you want after the loan balance is paid. Or trade it in for a vehicle that’s a better fit for your budget or your lifestyle.

In certain circumstances, an auto equity loan may be the best alternative to more risky forms of credit like a title loan. However, if your credit score allows it, it’s a good idea to seek out more conventional types of loans or lines of credit to meet your financial needs.