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Auto Equity Loan : What is It and When Should You Take One?

  • Auto Refinance
  • Renee Martin
  • 12 minutes

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Looking for a way to get some fast cash for emergency expenses? Auto equity loans are a great option if you’re looking for secured loans. However, keep in mind these essential pointers before taking one.

The reason why financial experts ask you to pay off your car loans as fast as possible is to build equity in your car. Having 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?

What Is an Auto Equity Loan?

An auto equity loan is a type of secured loan that lets you borrow an amount based on the equity you own in the car. The equity you own is the difference between the remaining loan balance and the current resale value of the car.

You can only take an auto equity loan if you have positive equity in your vehicle, i.e. if the resale value is more than the remaining loan balance.

How Does an Auto Equity Loan Work?

Auto equity loans work similar to home equity loans, except that instead of putting up your house as collateral, you use your car. Hence, an auto equity loan is also a secured loan and can help you get affordable rates and a better loan term. However, the amount you can borrow depends on the amount of positive equity you own in the vehicle.

While some lenders will only allow you to borrow an amount equal to the equity, others will let you borrow up to 125% of the amount. 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.

Representational image of an auto equity loan

Hence, depending on the lender, you will be able to borrow between $10,000 to $12,500 (125% of the equity amount). However, failure to pay back the loan on time can result in repossession and can also affect your credit score. For this reason, it is recommended to resort to a vehicle equity loan only for absolute emergencies.

When Should I Take a Car Equity Loan?

Car equity loans are a fast and easy option to borrow by putting up your car as collateral, whether you own it or not. You can consider taking one in the following situations:

  • When you need a way to get quick cash for a personal emergency
  • When you know, you have good equity in your car
  • If you want lower rates from a secured loan
  • If you’re confident of being able to repay the loan on time without repossession

How Can I Find How Much Equity I Have In My Car?

You can find the equity you own in the car by subtracting the current resale value of the car from the remaining loan balance you owe on the auto loan.

Equity = Current Vehicle Value – Remaining Loan Balance

If you get a positive number from the above calculation, you will be eligible for an auto equity loan.

What Happens If I Have Negative Equity in My Car?

If you have negative equity in your car, it means you owe more on the loan than what the vehicle is worth. This is also called being “upside-down” or “underwater” on your car loan. Having negative equity makes you ineligible to apply for an auto equity loan, and you’ll have to look at other ways of getting quick cash.

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What Is the Difference between a ‘Vehicle Equity Loan’ and an ‘Auto Title Loan’?

While both these terms are sometimes used interchangeably, there are not the same.

An Auto Equity Loan requires you to put up your car as collateral, but you don’t have to give up the title. They also offer longer-term loans and affordable rates.

An Auto Title Loan provides borrowers with fast cash in exchange for holding the title of the car as collateral. This is often useful for borrowers with bad credit, as they get access to loans without a credit check. However, the interest rates for title loans are very high (as much as 300%), which means a much higher rate of default and vehicle repossession.

According to the Mercatus Center, as much as 17% of all vehicle title loan borrowers are at risk of default, with at least half of them resulting in repossession.

What is an auto equity loan?

How to Get an Auto Equity Loan

  • Find out the equity you own in the vehicle: You can use vehicle valuation services like KBB or Edmunds to find the estimated resale value of your car. If you have a good amount of equity in your car, you can go ahead with the loan application.
  • Find lenders who offer equity loans: Unlike personal loans, auto equity loans are only offered by select lenders and credit unions. You can find several great lenders online, but ensure you do enough rate shopping before deciding on one offer.
  • Apply and finalize the loan: When you find a lender you like, be sure to go over the terms and conditions well before signing on. Make sure you are on time with your payments and don’t default on them.

How Do I Qualify and Apply for an Auto Equity Loan?

You could drive around your neighborhood and stop by local dealerships and banks in search of an auto equity loan. But online lending networks are more efficient as they let you apply for and see if you qualify for more than one loan by filling out just one form.  

How to qualify 

It’s not hard to get a loan against the value of your car. Following are some necessary qualifications for you to apply for an auto equity loan: 

  • You should be at least 18 years old. 
  • You must own the car you want to refinance. 
  • Have enough equity in the car to meet the requirements of the lender. 
  • No other loans on the car besides the one you have now. 
  • Have a stable monthly income, enough to pay the car payment. 
  • Share your current debts, housing costs, minimum credit card payments, and any garnishments on your income. 

If you prequalify for a loan and are approved, you will be given an estimated loan amount and links to one or more direct lenders. 

How to apply   

Prequalifying for an auto equity loan doesn’t mean you’ll get the loan in the end, but it’s a good first step. You still have to fill out an application with one or more of the direct lenders.  

Your credit score might go up or down a little bit if you apply for a loan. Each potential lender may check your credit, but if you are comparing rates, the credit bureaus will count all of your inquiries that are close together in time (within 30 days) as a single inquiry. Rate shopping is common in the mortgage business, but it also works for auto loans. 

The scoring system sees frequent hard pulls as signs of financial trouble, and each one can lower your already low credit score by a few points. But getting new credit can also raise your score, so the final effect is different for everyone and should be small, even if you don’t have good credit. Your score will only change if you do a hard pull. You agree to a hard inquiry when you apply for a loan or get a credit card. Hard inquiries stay for two years, but they only affect your credit score for one year. 

If the lender accepts your application, you’ll get all the forms you need to read and sign, including the Loan and Security Agreement. Before giving out the loan, the lender will usually want to look at the car. When you’ve done everything that needs to be done, the lender will close the loan in one to ten business days. If you get cash from your refinancing, the lender will either send you a check or put the money right into your bank account. 

Pros and Cons of Car Equity Loans


  • Since it is a secured loan, you get access to lower rates and better terms
  • It is much more dependable than an auto title loan, where the title has to change hands
  • Having positive equity can result in quicker approvals
  • You can get cash in hand in a short time – as quick as one business day


  • Not offered by all lenders – mostly credit unions
  • Failure to make payments can result in car repossession
  • Often requires you to have full-coverage insurance
  • Adding one more loan to your current loan can be a burden

Alternatives to Auto Equity Loans

Cash-back auto loan refinancing

If you anticipate a cash crunch in the future 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 getting to lower your APRs and monthly payment, you can also borrow an additional amount based on the amount of equity in your vehicle.

Auto Title Loans

Auto title loans offer fast cash, but you will have to 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 in a bad car loan, you can always trade-in your car for a cheaper one. If it is too old to be resold, sell off the car and use the money for your immediate expenses.

Payday loans

Payday loans are short-term, high-interest loans that are based on how much you earn every month. It doesn’t account for the ability of the borrower to repay and hence should be treated with caution.

Personal Loans

Taking a personal loan may be a better option 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 always put it up as collateral and get cash in hand using a home equity loan.

FAQs on Auto Equity Loan

What Does Auto Equity Mean?

Auto equity is the difference between the current resale value of the vehicle and the remaining loan balance you have to pay off. Having equity in your car will help you borrow money using the car as collateral.

Is Equity in a Car Good?

Having positive equity in your car is a good sign – it means you can use the car as collateral in a financial emergency. However, you can often end up with negative equity (owing more than what the car is worth) due to depreciation.

Can I Use My Car as Equity for a Loan?

Yes, you can use your car as equity for a loan as long as you have either paid off the auto loan completely or do not owe more than what the car is currently worth.

How Do I Know If My Car Has Negative Equity?

If the remaining loan balance is higher than the current resale value of the car, then you have negative equity and won’t be able to apply for an auto equity loan. You can instead try other options like cash-back auto refinancing, auto title loans, trade-in your car, and more.

Can I Borrow Money Using My Car as Collateral?

Yes, you can put up your car as collateral and get an auto equity loan to finance any immediate expenses. However, if you don’t pay back the loan on time, your car could be at risk of repossession.

Can I Take an Equity Loan Out on My Car?

Yes. Auto equity loans aren’t very common, but they let you borrow money using your car as collateral. Your auto loan equity is the difference between how much you still owe on your car loan and how much your car’s worth is currently. If you need money and have equity in your car, this could be a good way to get it. 

Do Banks Do Auto Equity Loans?

Most local banks and some credit unions offer loans against the value of your car. The rates for these loans depend on your credit score, how long you’ve had credit, and how much your car is worth. 

How Do You Access Equity in a Car?

Your equity would be the current worth of the car minus the balance of your loan, if any, if you still have a loan on it. 

Is Equity Financing a Good Idea?

With equity financing, you don’t have to pay back a loan. You have to make a monthly loan payment, which can be important if it doesn’t start making money immediately. This gives you the freedom to put more money elsewhere. 


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 many other loans for people with bad credit. Just make sure to keep making your payments on time or you could lose your car.

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