While auto equity loans aren’t very common, they allow you to borrow against the equity you have in your car. Your equity is the difference between your auto loan’s balance and how much your car is currently worth. If you have equity in your car and need to borrow money, this could be an option worth pursuing.
We’ll walk you through how auto equity loans work to help you decide if this type of personal loan is right for you.
How Auto Equity Loans Work
When you take out an auto equity loan, your lender will offer you a loan based on the equity you have in your car. If you’ve paid off your car loan and you owe it free and clear, your equity would be equal to the car’s current market value. If you still owe money on your loan, however, your equity would be equal to the car’s current value minus your loan balance.
For example, if the car is worth $20,000 and you owe $5,000 on it, you have $15,000 worth of equity ($20,000 – $5,000).
However, each lender sets its own rules for the maximum amount you can borrow. Some will let you borrow your full equity (such as the $15,000 in the previous example) while some offer loans up to 125% of your equity, which would work out to $18,750 in this case ($15,000 x 125%)
When Is an Auto Equity Loan the Right Choice?
An auto equity loan can be a good option if:
- You’re looking for lower interest rates.
- You have a good amount of equity built up in your car.
- You’re finding it hard to qualify for other traditional loans.
- You’re certain you can afford the loan so you don’t risk repossession of your car.
How to Get an Auto Equity Loan
Getting an auto equity loan is a bit different than applying for a personal loan. While lenders may set their own rules for the application process, here are rough guidelines you can follow:
- Make sure you have equity: If you don’t have any equity in your car, you won’t be eligible to get a car equity loan. To calculate your auto equity, subtract the remaining amount on your car loan from your car’s value (as determined by Kelley Blue Book or a similar resource).
- Find a lender: Auto equity loans aren’t that common, especially at big banks. Your best bet is to check with local credit unions and your current auto loan lender (if you still have a loan).
- Apply for the loan: Aside from the normal details like your income and credit score, lenders will want to know the details of your car so they can establish its value. They’ll also want to see the details of any auto loans you have so they can calculate and verify your equity.
- Pay off your loan: If you’re approved, congratulations! Remember to make all your payments on time. You can sign up for autopay so you don’t miss a payment.
Auto Equity Loans vs. Auto Title Loans
Both auto equity loans and auto title loans are loans based on the amount of equity you have in your car. Lenders are also likely to require you to offer up your title as collateral until you repay either type of loan.
However, auto title loans tend to be riskier. They charge very high rates, even on par with payday loans. These high fees can make it difficult to meet your repayment obligations and cause the lender to seize your car. For example, according to the Consumer Financial Protection Bureau, about 20% of auto title loan borrowers have their cars repossessed.
Auto title loans also tend to be short-term loans, typically a month or less. Auto equity loans, on the other hand, can be for several months or years just like with a traditional auto loan.
If you’re deciding between the two, we recommend you stick with auto equity loans.
Benefits of Auto Equity Loans
- Offer low rates: Auto equity loans are secured, which means your car serves as collateral and lenders can repossess it if you don’t pay. Because the collateral makes these loans less risky, lenders offer lower rates.
- Approvals may be easier: Again, since auto equity loans are less risky for lenders, it may be easier to get than an unsecured loan, which is based solely on your credit and financial standing.
- You don’t need to be a homeowner: The other type of equity-based loan is a home equity loan, but not everyone is a homeowner.
Drawbacks of Auto Equity Loans
- It can mean working with multiple lenders: If you get an auto equity loan from a different lender than your primary lender (if you’re still paying off the car), it can complicate things. You will have two loans to pay, manage and keep track of.
- You can potentially lose your car: Because these are secured loans and your car serves as collateral, you can lose your car if you fall behind on payments or default on your loan.
- They’re not widely available: You may have a tough time finding a lender for an automobile equity loan. They tend to be more common at credit unions, but you may not be eligible to join based on its membership requirements.
Auto Equity Loan Alternatives
The good news is that aside from auto equity loans, you have a lot of options for borrowing money if you’re in a pinch, including:
- Home equity loans. If you’re a homeowner, you can tap into your home equity, similar to an auto equity loan. Since mortgages are much larger than auto loans, you may be able to borrow a larger amount of money through a home equity loan.
- Personal loans. Personal loans are a great option if you need funds to cover a variety of expenses, including medical bills, emergencies or home improvement projects. There are even bad credit personal loans available, and while their rates may be higher than traditional personal loans, they’re much less than payday loans.
- Credit cards. Credit cards are versatile tools that let you borrow money on an as-needed basis up to your credit limit. You’re expected to repay your balance every month, and any unpaid balances will begin to accrue interest.
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