Auto equity loans are a type of secured personal loan where borrowers use the equity in their vehicle(s) as collateral. Similar to car title loans, they provide cash in as little as 24 hours.2 Auto equity loans are often appealing to individuals facing financial emergencies or those with poor credit scores.
However, like any personal loan, they come with advantages and disadvantages that borrowers should carefully consider before obtaining. When you borrow money, it’s essential to consider the terms and ensure it aligns with your financial goals.
In a Nutshell
Auto equity loans may have high-interest rates and the risk of vehicle repossession if payments are missed. Effective management involves budgeting and staying in touch with lenders. When seeking this type of personal loan, consider checking out local credit unions and small banks to find the best lender for you. Borrow money sensibly, whether through a secured loan or unsecured loan, understanding the terms is essential for responsible financial management.
How Auto Equity Loans Work
Auto equity loans enable you to access funds based on the equity you’ve built up in your vehicle. This is determined by its current market value minus any outstanding auto loan balance you may have. This type of personal loan does not affect your existing auto loan.
For instance, if your car is valued at $20,000 and you still owe $5,000 from the original car loan, you can borrow against the car’s equity of $15,000. However, if your car is fully paid off, you could potentially borrow an auto equity loan against the entire appraised value of the vehicle.
Be aware, some lenders might offer loans exceeding the typical equity value. For instance, with $5,000 in equity, you might be eligible for a loan of up to $6,250 (125% of your car’s equity). However, it’s crucial to note that these personal loans can carry high interest rates. Borrowing more than necessary could make repayment difficult. We advise being mindful when borrowing money, by only taking as much you truly need.
Auto equity loans usually range from a few hundred to several thousand dollars, depending on the value of the vehicle. Repayment terms vary but commonly span from 12-84 months.
To Qualify For an Auto Equity Loan, Borrowers Typically Need to Provide:
- The vehicle’s tile
- Government identification
- Proof of income
Pros and Cons of Auto Equity Loans
Pros:
- Quick Access to Cash: Auto equity loans offer access to funds usually in 1-2 business days, making them perfect for emergencies like unexpected expenses or job loss. With the vehicle’s equity as collateral, borrowers can ease financial stress.
- Availability for Borrowers with Bad Credit: These personal loans are accessible to individuals with poor credit scores. This is because a vehicle equity loan is secured by your car’s value, making your ability to repay more important than just your credit history.
- Higher Loan Amounts: Compared to other types of short-term loans like payday loans, auto equity loans typically offer higher loan amounts. This is due to the equity loan being based on the appraised value of the borrower’s vehicle.
Cons:
- High Interest Rates and Fees: Auto equity loans often come with high-interest rates and fees, increasing the overall cost of borrowing.
- Risk of Losing Your Vehicle: Defaulting on a vehicle equity loan can result in the repossession of the borrower’s vehicle, which is used as collateral.
- Hard to Find: Finding an auto equity loan lender might require some effort. Consider looking for a local small bank or credit union.
Comparison with Other Loan Types
- Home Equity Loan: Borrow against your home’s equity for expenses like renovations or debt consolidation. While offering lower interest rates, it’s important to remember that your property is used as collateral.
- Personal Loan: Unsecured personal loans usually require a good credit score. While their fixed interest rates and terms provide predictability, beware of potential high fees and term lengths.
- Credit Card: Revolving line of credit for purchases, balance transfers, or cash advances. Convenient, yet be cautious of accumulating high-interest debt and fees if not managed carefully.
- Payday Loan: Short-term, high-cost loans typically used for immediate cash needs. Known for their steep fees and interest rates, payday loans can quickly lead to a cycle of debt if not repaid promptly.
- Car Title Loan: Borrow against your vehicle’s value as collateral for quick cash. While they offer same day access to funds, they come with high interest rates and fees. Defaulting may lead to vehicle repossession.4
Auto Equity Loans VS. Auto Title Loans
Auto equity loans and auto title loans both provide borrowers with access to funds by leveraging the value of their vehicle, yet they have distinct differences.4
| Feature | Auto Equity Loan | Auto Title Loan |
| Borrow Amount | Up to car’s value minus outstanding auto loan | 25-50% of car’s value1 |
| Credit Score Requirement | Lower credit scores accepted | Lower credit scores accepted |
| Interest Rates | Lower interest rates(6-36%) | Higher interest rates (up to 300%)1 |
| Repayment Term | Extended repayment terms (months or years) | Short repayment terms(1-36 months) |
| Car Ownership | Borrower keeps car title | Lender holds car title until loan is repaid |
| Risk of Repossession | High risk if payments are missed | High risk if payments are missed |
Factors to Consider Before Taking an Auto Equity Loan
Before deciding on an auto equity loan, it’s important for borrowers to assess their financial situation carefully. Here’s how:
- Evaluate Finances: Consider your income, expenses, and potential changes in finances to ensure you can comfortably handle repayments.
- Understand Loan Terms: Know the interest rates, fees, and repayment schedules of the auto equity loan. This formulates the total cost to see if it fits your budget.
- Explore Alternatives: Look into other financing options, such as personal loans or negotiating with creditors. This gives you more flexibility and may lead to better terms.
By following these steps, borrowers can make informed decisions that suit their financial goals while minimizing risks.
Tips for Managing an Auto Equity Loan
Facing an auto equity loan can feel overwhelming, but there are steps you can take to manage it effectively. Here are some strategies to get a handle on your auto equity loan and minimize financial stress:
- Budgeting and Prioritizing Payments: Set a budget and prioritize your loan’s monthly payment to avoid extra fees or penalties.
- Communicating with Lenders: Talk to your lender if you’re facing financial difficulties to explore solutions like refinancing.
- Exploring Alternatives: Consider options like credit counseling or debt management programs instead of rolling over the loan.
Conclusion
Auto equity loans can be a valuable resource for individuals in need of quick cash, especially those with poor credit. However, borrowers must weigh the pros and cons carefully and consider alternative options before proceeding. By understanding the terms, managing the vehicle equity loan responsibly, and exploring alternative solutions, borrowers can make informed decisions regarding their financial well-being.
If you are thinking about a car title loan, you can apply online with no obligations. Additionally, if you have any questions or require further assistance, please don’t hesitate to reach out to our team at (888)-309-0994. We’re here to help you navigate your borrowing options and help you make the best financial decisions for your circumstances.1
FAQ
Is it a Good Idea to Get an Auto Equity Loan?
An auto equity loan can be a good option for borrowers needing fast funds when facing emergencies. It usually offers lower rates than unsecured personal loans, but be mindful of the risk of repossession. Carefully evaluate your budget before borrowing.
Can I Borrow Against the Equity in My Vehicle?
Yes, you can borrow against the equity in your vehicle. An auto equity loan lets you use the value of your car as collateral for the loan. This value is calculated by subtracting the amount you still owe on the car from its current market value.
What is the Interest Rate on a Car Equity Loan?
Interest rates on auto equity loans can vary but usually fall in the range of 6%-36% APR depending on factors like credit score, length of the vehicle equity loan, loan amount etc. Typically, a credit union offers competitive rates and personalized service. This makes them a favorable option for borrowers seeking financial assistance.
Can You Get an Auto Equity Loan With Bad Credit?
Yes, an auto equity loan is accessible to borrowers with bad credit since they are secured by collateral rather than solely reliant on credit history. However, borrowers with less than perfect credit should be prepared for higher interest rates and fees.
Can You Sell a Car That Was Used as Collateral For a Loan?
When it comes to auto equity loans and car title loans, you can’t sell the assets you pledged as collateral until the loan is fully paid off. Talk to your lender before considering selling the vehicle to see what options you have.
Written by
Crystal Voogd
Crystal, with a bachelor’s degree in Family and Human Services and a minor in Finance, offers a unique perspective. Specializing in personal finance, Crystal’s clear and insightful writing covers topics such as title loans, budgeting, and credit management. Dedicated to empowering readers in their financial journey, Crystal provides reliable guidance for informed decision-making and stability.
