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If you’ve owned your car for several years, it may be a source of cash even if you don’t want to sell it. Auto equity loans let you turn the equity you have in your car into a loan you can use for any purpose.
While the risks and interest rates may not be suitable for every borrower, a strategic approach to this loan can quickly get you the cash you need. Let’s explore if a car equity loan makes sense for you.
Key Points
• Auto equity loans leverage the current value of your vehicle minus the amount you still owe on it.
• Terms for these loans, such as the amount you can borrow and repayment terms, vary by lender.
• A vehicle equity loan is a secured loan, and it comes with easier approval and lower interest rates than an unsecured loan.
• The primary risk of these loans is that the lender can repossess your vehicle if you default on the loan.
• Before committing to an auto equity loan, consider other loan and refinancing options that may be more appropriate for your circumstances.
How Auto Equity Loans Work
Vehicle equity loans depend on how much your car is worth vs. how much you owe on the car. For example, say your car is worth $15,000. You’re almost finished paying off your car loan and owe only $1,000 on it. So, you have $14,000 of equity you can leverage with an auto equity loan.
Your vehicle’s equity is the basis for a loan, and terms vary by lender. For example, some lenders may loan a maximum of 100% of your auto equity, while others may loan up to 150%.
Like any loan, a car equity loan comes with terms and conditions, including the interest rate, repayment schedule, and loan fees.
However, the unique aspect of auto equity loans is that the vehicle serves as collateral, making them secured loans. The advantage is that you can obtain better terms and rates than with an unsecured loan. The downside is that the failure to repay the loan gives the lender the right to repossess the vehicle to recoup its losses.
Auto Equity Loan vs Auto Title Loan
Auto title loans and car equity loans sound similar, but they differ in significant ways with serious implications for borrowers. Auto equity loans allow you to turn the equity you have in your car into a loan you’ll repay over the coming months or years. Defaulting on the loan can result in repossession.
Auto title loans also use equity in your car but have more stringent terms and rates. Typically, auto title loans give the borrower one month to repay the loan with higher interest rates than auto equity loans.
The sole upside is that these loans have minimal credit requirements, making them accessible to more borrowers. The downside is that the loan terms are so stringent that borrowers often fail to repay the loan within 15-30 days, default on the loan, and lose their vehicle.
💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options.
How to Get an Auto Equity Loan
Getting an auto equity loan means assessing your equity, finding a lender, and applying. Here’s the step-by-step guide.
1. Check Your Equity Level.
Get an accurate estimate of your car’s current market value. Online tools such as Kelley Blue Book or Edmunds can help. Once you know the value, subtract any outstanding loan balance on your car from it. The result is your equity. Remember, lenders use the equity amount to determine the maximum loan amount you can receive.
2. Shop for a Lender.
Look for reputable lenders that offer auto equity loans. Specifically, auto lenders, credit unions, and online lenders offer these loans. Peruse customer reviews and gather offer information, including interest rates and loan fees. Lenders also have different eligibility requirements, such as equity amount and credit score standards.
3. Apply for the Loan.
Once you choose your lender, prepare the required documentation for the application, including proof of income, identification, vehicle title, and proof of insurance. Then, you can apply via your lender’s website, in person, or by phone.
If approved, carefully review the loan terms before accepting. Pay attention to interest rates, repayment schedules, and any fees associated with the loan.
Pros and Cons of an Auto Equity Loan
Like any financial decision, getting a car equity loan has advantages and disadvantages. Here are some potential pros of auto equity loans:
• Competitive interest rates: Because you secure the loan with your vehicle, you’ll likely get a lower interest rate than an unsecured loan or credit card.
• Less-stringent approval: Because a car secures the loan, borrowers with lower credit scores or a less-than-perfect credit history are more likely to qualify.
• Quick funding: Auto equity loans often provide a faster funding process than traditional loans. In some cases, borrowers can receive funds within a day of approval.
• Customizable terms: Some auto equity lenders may offer flexibility in repayment schedules, allowing borrowers to customize the loan terms to better suit their financial situation. For example, you can shorten the term to reduce the loan’s duration and lower total interest costs.
However, consider the following cons as well:
• Risk of losing your car’s equity: Auto equity loans are secured loans, meaning the vehicle serves as collateral. If you fail to repay the loan in accordance with the agreed terms, the lender can repossess and sell your car.
• Full-coverage insurance requirements: Many auto equity lenders require borrowers to maintain full-coverage insurance on the vehicle throughout the loan period. This coverage costs more than minimum liability insurance.
• Uncommon among lenders: While auto equity loans are available, they might not be as common or widely offered as other types of loans. This drawback can limit the options available to borrowers. In addition, your current auto lender might not offer this loan, meaning you’ll end up having auto loans with multiple lenders.
Auto Equity Loan Alternatives
A vehicle equity loan is just one way to get the financial assistance you need. Other loan tools are available. Here are some to consider.
Personal Loans
Personal loans can be used for various purposes, including financing a car or covering regular expenses. Unlike car equity loans, most personal loans are unsecured, meaning they do not require collateral, such as your vehicle.
Interest rates on personal loans can vary based on your creditworthiness and may be higher because they don’t have collateral. However, borrowers with higher credit scores generally qualify for lower interest rates. Personal loans usually have fixed monthly payments over a predetermined term.
New Credit Card
Credit card companies frequently offer cards with low or no APRs to attract new customers. So, you can apply for a new card and take advantage of the promotional interest rate. For example, if you get a new card with 0% APR for one year, you only have to make the minimum payment on the balance each month for the first 12 months.
This feature allows you to accrue debt without paying it back immediately. Just remember that when the promotional period ends, any balance will start accruing the card’s regular APR.
In addition, most credit cards are unsecured, so no collateral is needed.
Home Equity Loan
A home equity loan is like a car equity loan, but it uses equity in your home rather than the equity in your vehicle. It is a secured loan because your home serves as collateral, and the debt is secured as a second mortgage.
Home equity loans typically have fixed interest rates and fixed monthly payments over a specific term. The loan amounts can be larger because homeowners can build up hundreds of thousands of dollars of equity to tap.
Additionally, home equity loan interest rates are often lower than those for unsecured loans. However, you could lose your home if you default on the loan.
Auto Loan Refinance
Car loan refinancing involves replacing your existing auto loan with a new one, usually with better terms such as a lower interest rate or an extended repayment period. Doing so can lower your monthly payment, making your loan more affordable.
Quick Tip: In a climate where interest rates are rising, you’re likely better off with a fixed interest rate than a variable rate, even though the variable rate is initially lower. On the flip side, if rates are falling, you may be better off with a variable interest rate.
The Takeaway
Car equity loans leverage a vehicle’s equity for access to cash with low waiting times. While offering advantages such as potentially lower interest rates and quick funding, they can also pose significant risks, including the risk of losing the car. Full-coverage insurance requirements and the relative uncommonness of these loans among lenders add to their drawbacks.
If you’re considering an auto equity loan, carefully assess your financial situation and alternatives, including personal loans, credit cards, home equity loans, and auto loan refinancing. Thorough research into reputable lenders is crucial to making an informed decision that aligns with your financial needs and goals.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
Is it good to have equity in your car?
It’s good to have equity in your car because you can use it as collateral to get an auto equity loan or sell it for a profit. It can also provide you with a financial cushion in case you lose your job or have a medical emergency, for example.
Can you cash out auto equity?
You can turn the equity you have in your car into cash with a cash-out refinance from a lender. This will provide you with a lump sum equal to your equity amount and replace your current auto loan with a new loan with an accordingly larger balance.
Is it a good idea to get an auto equity loan?
If you have thousands of dollars in equity and can’t access other forms of credit, a vehicle equity loan can provide a quick solution. However, it’s crucial to carefully evaluate if you can afford the monthly payments before deciding. Otherwise, you may lose your car if you fail to repay the loan.
Photo credit: iStock/sturti
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