An auto equity loan is a type of secured loan where car owners use their cars as collateral. Here, your equity loan is calculated based on the actual value of your car minus your outstanding loan.
By tapping into this equity, you can obtain cash for a variety of objectives, including home improvements and debt reduction. However, taking out a car equity loan is not a decision to be taken lightly, as it requires you to use your car as collateral.
In this article, we’ll discuss the ins and outs of auto equity loans, how they work, and any potential advantages or disadvantages, when determining if taking out a car equity loan is the best financial decision for you.
How Does an Auto Equity Loan Work?
An auto equity loan is a secured loan that leverages the equity in your car as collateral. Your lender will evaluate how much you still owe on any previous auto loans, as well as the current market value of the vehicle. The equity you are borrowing is the difference between the car’s value and the amount of your loan.
Depending on your lender and your creditworthiness, lenders may give auto equity loans up to 25–50% of the value of the car. Rather than the car’s entire value, the loan amount is determined by the equity.
Also, the interest rate on auto equity loans is relatively high compared to traditional auto loans or home equity loans. As earlier said, the rate depends on your credit score and the lender.
It is also important to note that, if you fail to repay your loan, the lender has the right to hold the vehicle’s title as collateral and can even repossess the car.
When Is an Auto Equity Loan the Right Choice?
An auto equity loan could be the right choice for you if you have a substantial amount of equity built up in your car and if you’re looking for lower interest rates.
You can also opt for a car equity loan if you find it hard to qualify for other traditional loans. Those who are also 100% sure they can afford the loan without risking repossession of their vehicle can also apply for an equity loan.
Advantages of Auto Equity Loans
A car equity loan is a great financial tool for individuals who intend to utilize the value of their cars. There are lots of benefits offered by auto equity loans, such as:
- Easy Approval: An auto equity loan is generally less risky for the lender, so it is often easier to get compared to an unsecured loan. While an unsecured loan is approved based on your financial standing and credit history, auto equity loans require the equity in your car.
- Offer Low Rates: Since auto equity loans are secured, it requires borrowers to put up collateral for their loan. The collateral makes the loans less risky and gives lenders peace of mind; hence, most lenders offer lower rates. This also means that your lender can repossess your car if you don’t make the loan payment. .
- You Don’t Need To Be A Homeowner: You don’t necessarily have to be a homeowner before you can take out an auto equity loan. Provided you have a large amount of equity on your car, most lenders will be willing to work with you.
Disadvantage of Auto Equity Loans
Although auto equity loans offer numerous benefits to individuals, let’s also consider their drawbacks. Outlined below are disadvantages of auto equity loans:
- You can risk losing your car: If you recall, we mentioned that auto equity loans are secured loans and your car will be used as collateral. You can potentially lose your car if you miss a payment or default on your loan.
- It is complex: Taking out a car equity loan can mean working with multiple lenders. If you take out an equity loan from another lender other than your primary lender, things can get a little bit complicated. This means you have two loans to manage and keep track of.
- It is not widely available: Owing to the fact that auto equity loans are not that common, especially in banks, you may encounter difficulty finding a lender that offers this type of loan. It is more common at credit unions, but you need to meet certain requirements before the loan can be approved.
How to Get an Auto Equity Loan
The process of applying for a car equity loan is not the same as an application for a personal loan. Although it is similar, there’s a slight difference.
Some lenders may also set rules that guide their application process; it is essential to pay close attention to them. Nevertheless, follow the guidelines highlighted below to get an equity loan:
- Make Sure You Have Equity: The first thing most lenders will assess is the equity on your car; this is to determine if you’re eligible for the loan. If you don’t have equity in your car, you will most likely not qualify for an auto equity loan. You can calculate your auto equity by subtracting the remaining amount on your car loan from the actual value of your car.
- Find A Lender: Once you’ve confirmed the equity on your vehicle, be on the lookout for lenders that offer auto equity loans. Though auto equity loans are not that common, you can still check with local credit unions.
- Apply For The Loan: If you’ve found a lender, submit an application for the loan. You will be required to provide information on your credit score, income, and car value. Most lenders will request the details of any auto loans you have taken out to calculate and verify your equity.
- Pay off Your Loan: If your loan application is approved, you can now make use of the funds for the purpose you took it out for. It is also important that you repay your loan at the stipulated time. To make your payment easier, you can sign up for autopay, so you don’t miss a payment and end up getting penalized.
Auto Equity Loan Alternatives
Aside from auto equity loans, there are several other ways you can borrow money if you find yourself in a difficult situation. Check out these alternatives:
Personal loans: This is a great option if you need money to cover a lot of expenses, such as home projects, medical bills, and other emergencies.
- Home Equity Loans: You may qualify to borrow a large amount of money if you’re a homeowner through home equity loans.
- Trade or Sell Your Car: Another great alternative is selling or trading your car in an online marketplace. The money gotten from selling your car will be used for the purpose for which you want to take out a loan. You can also trade your car to fit your current budget and lifestyle.
- Credit Cards: You can also utilize your credit card to borrow money rather than taking out a car equity loan. Remember that you are required to repay your balance at the end of the month.
FAQs
What can I use an auto equity loan for?
An auto equity loan is designed to allow individuals to use the equity in their vehicle to get a loan from a lending institution. This type of loan can be used for various reasons. You can use an car equity loan to fund your home renovation, cover medical expenses, and finance a major purchase. You can as well use it to consolidate high-interest debts and start a business.
How do I qualify for an auto equity loan?
In order to be considered eligible for an auto equity loan, there are certain criteria you must meet. They include a consistent income, a good credit score, and a low debt-to-income ratio. In addition, you must also have a particular amount of equity in your vehicle before you can qualify for a car equity loan.
How do I apply for an auto equity loan?
To apply for a car equity loan, you are required to provide certain financial documents, such as pay stubs, tax returns, and vehicle appraisals.
These documents are what your lender will use to determine your eligibility for the loan. Furthermore, you will need to provide information about your vehicle and complete the loan application.
It is important to check for further information on how to apply through the specific lender you’re working with. This is because the process of applying for a car equity loan varies across different lenders.
