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What is an Auto Equity Loan?

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If you own a vehicle and need cash, an auto equity loan can be a short-term solution during an emergency. While these loans are less common, some lenders, including credit unions, do offer them. Look at your loan options and shop around with lenders. Make sure to find the auto equity loan that suits your needs before you jump in.

What is an auto equity loan?

An auto equity loan allows you to borrow money based on the current value of a car that you own. Some lenders currently advertise that you could borrow up to 125% of your car’s equity for up to seven years. You’ll have to repay the borrowed amount, plus any interest and fees that the lender charges. If you don’t keep up with your payments, the lender may have the right to repossess your car.

Auto equity loan versus auto title loan

Both loans allow you to secure funds using your vehicle. Auto equity loans tend to be longer-termed with lower rates. Meanwhile, auto title loans are typically for short terms, such as a month, and have much higher rates. The Consumer Financial Protection Bureau reported in 2016 that 20% of people who took out auto title loans had their vehicle repossessed. If you want to use your vehicle equity for a short-term loan, consider getting an auto equity loan and paying it back early.

When is an auto equity loan a good choice?

An auto equity loan can be a good choice compared with an auto title loan, payday loan or personal loan. Because it’s secured, APRs are lower than what you may find from an unsecured loan. If you choose an auto equity loan, you should have a good amount of equity in your car and be certain that you can make the payments.

How to get an auto equity loan

  1. Calculate your car equity. Find out how much your car is worth by using an industry guide, such as Kelley Blue Book or Edmunds. If you don’t own your vehicle, subtract how much you owe on your car loan from what it’s worth.
  2. Compare lenders. Credit unions may be the best provider of an auto equity loan, as they tend to charge lower rates than banks — however, we still recommend that you shop around.
  3. Apply and accept. Apply to a few lenders and accept the best offer. You won’t hurt your credit applying to multiple lenders any more than applying to one as long as you do so within the two-week time window for rate shopping allowed by the credit bureaus.

Pros and cons of an auto equity loan

Pros

  Lower APR. Because an auto equity loan is a type of secured loan, you could qualify for a lower rate than on an unsecured loan, such as credit cards and personal loans.

  Repayment options. An auto equity loan could be short term or long term, depending on what you need and what the lender offers.

  Easy to qualify. If you are the sole owner of a car with a positive equity position, you will likely qualify for an auto equity loan.

  Quick access to cash. The process can take as little as one business day, which is less time than many other kinds of loans, such as a home equity line of credit that can take two to four weeks.

Cons

  Possible car repossession. If you default on your payments, you could lose your car. This could be especially bad if you rely on it to get to work.

  More debt. Being in debt is something to balance and budget for carefully. If you currently have a loan on your car and add a loan on your car equity, it could be complicated to manage payments. Here’s advice on how to reduce debt.

  Full coverage car insurance required. Lenders require that you have full coverage insurance on your car, not just the state-required minimum liability insurance, whenever you have a loan on it. This could increase your monthly insurance costs.

Alternatives to auto equity loans

Here are some alternatives and how they compare to auto equity loans.

Cash-out auto refinance

If you currently have a car loan, you may be able to do a cash-out refinance and get some funds based on the equity you have in it. This way, you can have only one secured loan and one payment rather than two.

Auto title loans

We don’t recommend auto title loans. They tend to have short terms, sky-high interest rates and a high likelihood of lender repossession.

Personal loans

Personal loans are based solely on the credit history and credit score of the borrower. Lenders typically require great credit because the loan doesn’t have collateral. This means if you default on payments, your car wouldn’t be repossessed but your credit score will be damaged.

Home equity loans

A home equity loan uses your house rather than your car as collateral for a loan. Because real estate tends to appreciate, whereas vehicles tend to depreciate, you may find an even better rate on a home equity loan than an auto equity loan. But not everyone has equity in a home loan, and the danger of repossession still exists if you default on payments.

Credit cards

Most credit cards offer unsecured borrowing and are widely available. You may already have one and be tempted to use it rather than take out a loan. Some offer deals and low rates when you first sign up, such as a 0% introductory APR on your balance for a year. However, others can have APRs near 20% or even higher. The interest can add up and quickly become more expensive than another type of loan, especially if you only make the minimum payment on the card each month.

Side hustle

You could make money with your car to get some cash in your pocket rather than going into debt and putting your car on the line. There are active and passive methods to use your vehicle to earn some income.

Trade in or sell your car

You could trade in your vehicle for a less expensive one and get some cash from the deal or you could straight-up sell your car. Dealerships, such as CarMax, offer to purchase vehicles without requiring you to buy one of theirs. You could also sell your car to an individual rather than to a business.

 

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