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Key learning points
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A car equity loan is a type of personal loan that uses your car as collateral.
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These loans can offer lower interest rates compared to regular personal loans, but you may have your car repossessed if you can’t keep up with the payments.
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Auto loans can be a good option for people who have equity in their car and need money, but there are also alternatives such as personal loans and credit cards.
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It’s important to budget carefully and pay on time to avoid losing your car as collateral.
A typical personal loan lets you borrow money without any collateral, but a car loan lets you borrow money against the value of your car. Having a secured loan can mean a lower interest rate. However, you should consider the benefits and risks of an auto equity loan before taking one out.
What is an auto equity loan?
An auto equity loan is a type of personal loan that uses your vehicle as collateral. You borrow against the equity of your car. The equity is the difference between the market value of the car and the amount you still have to pay off. You can use this loan for any purpose.
To secure an auto equity loan, the value of your vehicle must exceed the outstanding balance you owe on it.
For example, if your car is worth $25,000 and you have a loan balance of $10,000, you have $15,000 in equity that you could potentially borrow against. With a car equity loan, you can borrow up to 100 percent of the equity in your car, up to a certain limit.
Because the loan is secured by your vehicle, you can likely get a lower rate than a normal personal loan. However, because your car is used as collateral, you run the risk of having it repossessed if you don’t make your payments on time.
Bank interest tip
If you want an auto equity loan, check with your bank or credit union first. They may offer the service, or they may have a partner they can put you in touch with.
Auto equity loan vs car loan
A car loan is a short-term loan that uses your vehicle as collateral. Car loans are often much more expensive than car loans. By comparison, auto equity loans often have longer terms and lower interest rates.
Advantages and disadvantages of an auto equity loan
Consider everything an auto equity loan has to offer. Faster approval and potentially lower rates may not outweigh how difficult these types of loans are to find.
Plus points
- Faster Approvals: For people with bad credit, an auto equity loan can mean quick approval. Because you can use the equity in your car as collateral, the bank can ensure that it gets its money back.
- Low interest: The interest you receive on an auto equity loan is tied to your credit score and the value of your car. That means if your car is worth a lot, you might be able to get a good rate even with less-than-perfect credit. Best Egg, a lender that offers this type of loan, has rates from 8.99 percent and terms of up to 60 months.
Cons
- Vehicle is collateral: If you stop making payments, the lender may seize your vehicle to recoup the losses.
- Hard to find: Auto equity loans are not common. If you’re looking for an auto equity loan, check with your bank or credit union first. They may offer the service, or they may have a partner they can put you in touch with.
- Limited quantities: As with any equity loan, the amount you can borrow is partly determined by the amount of equity you have in your car. For example, someone with a $10,000 car and $5,000 in equity can get a $5,000 loan. Someone with a less valuable car may not be able to get a loan at all.
Who is a car equity loan best for?
An auto equity loan may be right for you if you meet the following:
- You have equity in your car: The most important part of being a good candidate for a car loan is having enough equity to take out a loan.
- You can make payments: As your car goes on the market, it’s important to know that you can make payments every month. If you do not do this, your vehicle may be confiscated. This can be especially a problem if you need the car every day.
- Interest rates may be lower than what you are currently getting: In this case, it may make sense to opt for this unusual loan type instead of something that is more readily available.
Alternatives to a car loan
If you can’t get a car loan or the application process isn’t as smooth as you’d like, you may want to consider loan options that don’t require your car.
Home equity
Similar to an auto equity loan, a home equity loan relies on you having equity in your home. Normally you can borrow a maximum of a percentage of your equity or a predetermined ceiling. If you own your home, this may be a viable alternative.
Personal loan
Unsecured personal loans are a solid alternative to car loans. However, personal loan rates are likely to be higher because they are unsecured. The process for obtaining a personal loan is similar to that of obtaining a car loan and can be done in person or online.
Credit cards
Although they are an alternative, credit cards are usually much more expensive than a personal loan or a secured loan. However, they are also easier to qualify for and you can access the credit immediately once approved.
Next steps
A car equity loan can be a good idea if you need the money and can find one. But it’s important to budget accordingly. If you can’t pay, your vehicle is at risk.
