Are you in a bind and need some quick cash for unexpected expenses? Auto equity loans can be a lifesaver when you’re looking for a secured loan option. But before you go down that road, you should keep a few important things in mind. Let me fill you in on the basics you need to know before taking the plunge.
Financial experts ask you to pay off your car loans as fast as possible to build equity in your car. Positive equity can help you use your car as collateral for financial emergencies and situations where you need quick cash. Auto equity loans are one of the options used by borrowers in such circumstances. This post breaks down everything you need to know about vehicle equity!
What is an auto equity loan?
Auto equity loans are loans in which you use the equity you have in your car to borrow money. In other words, it is the car’s value minus what you still owe. For example, if your car is $20,000 and you owe $12,000 on it, you might be able to borrow $8000 against it as equity.
However, you can only take a car equity loan if your vehicle has positive equity, i.e., if the resale value is more than the remaining loan balance.
Who should qualify for an auto equity loan?
You may qualify for an auto equity loan if you satisfy the following criteria:
- You own your car: In qualifying as a viable applicant for an auto equity loan, sufficient equity serves as the collateral for the loan.
- You have the financial means to make payments: Given the potential consequences for your car, it is critical to ascertain that you are able to make monthly payments. If you fail to do so, your car could be repossessed.
- Possible Lower Interest Rates: It may be prudent to choose this uncommon loan type in this situation as opposed to something more readily available.
How does an auto equity loan work?
Auto equity loans work similarly to home equity loans, except that you use your car instead of putting up your house as collateral. Hence, a car equity loan is also secured and can help you get affordable rates and a better loan term. However, the amount you can borrow depends on the positive equity you own in the vehicle.
Firstly, you need to own the car to apply for an auto equity loan. Secondly, you should submit proof of income and your driver’s license. In addition, you need to ensure a good credit score to apply for the auto equity loan. For instance, it will determine the interest rates and the amount you can borrow.
While some lenders will only allow you to borrow an amount equal to the equity, others will let you borrow up to 125%. For example, let’s say you have a car with a current resale value of $15,000 and a remaining loan balance of $5000. Then, the equity you own in the car will be $15,000 – $5000 = $10,000. Similarly, the equity loan rate averages between 6% and 36%.
Hence, depending on the lender, you can borrow between $10,000 and $12,500 (125% of the equity amount). However, failure to repay the loan on time can result in repossession and affect your credit score. For this reason, it is recommended to resort to a vehicle equity loan only for absolute emergencies.
How to get an auto equity loan
Evaluate your credit
It is prudent to review your credit reports from all three main credit bureaus—Equifax, TransUnion, and Experian—prior to applying for any loan. The lender is likely to conduct a credit check on your credit reports during the financing application procedure.
Thus, it is critical to ascertain one’s financial situation prior to submitting loan applications. The Fair Credit Reporting Act (FCRA) provides individuals with the ability to contest errors found on their credit reports by entering into a dispute process with the relevant credit reporting agency.
Compare rates from lenders
As with any other form of financing, it is prudent to compare loan offers from multiple lenders when considering auto equity loans. By doing so, you can frequently find the most advantageous deals, such as reduced fees and interest rates, which can result in significant cost savings.
A personal loan calculator allows you to compare the total cost and payment quantities of multiple loan offers over time.
Find your car’s worth
You should then determine the value of your car to assess your borrowing capacity more accurately. Consult an industry publication like Edmunds or Kelley Blue Book for assistance. If you still have an auto loan affixed to your car, deduct the outstanding loan balance from the value of your vehicle to determine the amount of available equity.
Apply for a car equity loan
You may be prepared to apply for an auto equity loan once you have determined your top choice. Submitting multiple pre-approval requests to lenders who provide this option is generally acceptable. Generally, these applications require mild credit inquiries, which have no bearing on the applicant’s credit score.
However, it is crucial to restrict the number of comprehensive loan applications you submit, as these frequently involve hard credit inquiries that can negatively affect your credit score.
Due to the fact that auto equity loans may be categorized as a form of personal loan, you risk establishing a negative credit history if you submit multiple loan applications within a brief period. Consequently, it is more prudent to choose your preferred lender in advance (and verify that you are likely to meet the lender’s approval requirements).
Loan repayment
You must repay your auto equity loan in accordance with the terms of the loan agreement. If you repay the loan as agreed, your credit history and credit score will be positively impacted. If not, you run the risk of having your car repossessed, as it functions as collateral for the loan.
Where to find auto equity loans
While you get your auto equity loan based on interest rates, loan terms, credit score requirements, and the car’s value, you mostly find auto equity loans with banks, credit unions, and online lenders.
Pros and cons of auto equity loan
| Pros | Cons |
| Lower interest rates: Since it is a secured loan, you get access to lower rates and better terms | Not offered by all lenders: Auto equity loans may not be available to all lenders; instead, it is mostly provided by credit unions. |
| Larger loan amounts: The amount you borrow depends on how much equity you have in your car. For instance, a higher-valued car with maximum equity will offer you large loan amounts. | Potential repossession: Failure to make payments can result in car repossession. |
| Lenient approval criteria: Having positive equity can result in quicker approvals. | Full-coverage auto insurance: Most lenders often require full-coverage insurance with a low deductible to be eligible for an auto equity loan. |
Credit score required for an auto equity loan
As you get auto equity loans with your vehicle’s value, you can opt for financing even if your credit score isn’t excellent. The credit score criteria for each lender vary. So, always study the credit requirements before applying for a loan.
Check your credit score and reports in advance to see what type of loan you require and how much you must pay. Some lenders also offer pre-approved applications that you can fill out to determine your eligibility and likely rate with only a soft credit review.
Best alternatives to auto equity loan
Cashback auto loan refinancing
If you anticipate a cash crunch due to high monthly car loan payments, a better option would be to refinance your auto loan to get better terms and conditions. The benefits of doing this are that besides lowering your APRs and monthly payments, you can also borrow an additional amount based on the equity in your vehicle.
Auto title loans
Auto title loans offer fast cash, but you must give up the vehicle title until you pay off the loan. So choose this option only if you are desperate for funds and can afford to pay high rates for the short term.
Trading in your car/ sell it to a third party
If you think you’re stuck with a bad car loan, you can always trade in your car for a cheaper one. If it is too old to be resold, sell it off and use the money for your immediate expenses.
Payday loans
Payday loans are short-term, high-interest loans based on monthly income. They don’t account for the borrower’s ability to repay and, hence, should be treated with caution.
Personal loans
A personal loan may be better if you have a good credit score and payment history. You can also avoid the need to put up collateral.
Home equity loans
If you own a house, you can use it as collateral for a home equity loan and get cash in hand.
Auto equity loans vs. Car title loans
Auto equity loans and car title loans may look similar at first glance. However, it’s important to know that these two types of funding are not the same.
Auto equity loans are a type of personal loan where you use the value of your car as collateral. A car title loan is different; it is similar to payday loans and pawnshop loans, which are both types of high-cost monthly loans. People can get these loans quickly and with little or no credit check, but the interest rates can be as high as 300% APR.
Can I take a loan against my car?
Yes, you can take a loan against your car. A “pink slip loan” or “title pawn” is another name for a car title loan. This type of loan uses your car as collateral.
Anyone can get a car title loan and borrow between 25% and 50% of the value of their car in exchange for giving the lender the title to their car as protection.
Final thoughts
No matter what you need money for, you can use the value of your car as a source when times are tough. It will also give you better terms and lower interest rates than other loans for people with bad credit. Just make sure to keep making your payments on time, or you could lose your car.
