Auto equity loans are not the most popular type of lending. These credit solutions work similarly to home equity loans. However, you can acquire financing by utilizing the equity in your car as collateral for auto equity loans. Everything you need to know about auto equity loans, including its benefits and drawbacks, is explained here. If you’re interested in this type of financing, you’ll learn how to get an auto equity loan and a variety of additional lending alternatives.
What is an Auto Equity Loan
An auto equity loan is a kind of personal loan where your car is used as security. On the of your car equity, you take out a loan. The amount that remains to be paid off after deducting the car’s market value is known as equity. This loan is yours to utilize however you see fit.
Your car’s worth must exceed the amount you still owe it to qualify for an auto equity loan. For instance, you may be able to borrow against $15,000 in equity, if your automobile is worth $25,000 and your loan total is $10,000. You can borrow up to 100% of your car’s equity with an equity loan, subject to a set maximum.
You should be able to acquire a cheaper rate than you would with a typical personal loan because the loan is secured by your car. However, if you don’t make your payments on time, your automobile could be repossessed because it would be used as collateral.
How Does Auto Equity Loan Work
When determining how much you can borrow for an auto equity loan, the lender looks at information about your car and your existing loan, if any. In addition to needing approval, you could not be eligible if your automobile is more than ten years old or has more than two hundred thousand miles on it.
If you are eligible, the title of your car is held by the lender until you make monthly installment payments to cover the remaining amount (plus interest and fees). The following qualities usually translate into auto equity loans with the lowest rates available:
- Low-mileage, more recent vehicle.
- No liens against your vehicle, flood or hail damage, or salvage status.
- 700 or higher credit scores.
- Take out a loan for no more than 80% of the car’s worth.
- Short loan payback period.
Who Needs an Auto Equity Loan
If you can make monthly payments, have enough equity in your automobile, and need urgent cash, you may be able to get an auto equity loan. Moreover, auto-equity loans pay off credit card debt and other high-interest debt.
An auto equity loan might be worth considering if the interest rate is lower than that of other loan options. Additionally, if you have low credit, auto equity loans are a great alternative because some lenders won’t even take your credit history into account when granting an application.
Advantages and Cons of an Auto Equity Loan
If you have an emergency, you might be able to get money quickly with an auto equity loan, which might be simpler to obtain than a credit card or personal loan. Before signing on the dotted line, make sure you are aware of the advantages and disadvantages of an auto equity loan.
The following advantages include;
Low APRs
Compared to credit cards or unsecured personal loans, the auto equity loan will probably have a lower annual percentage rate (APR) because your automobile acts as collateral.
Simple to qualify for
The amount you can borrow depends on the loan-to-value (LTV) ratio of your vehicle. Although your credit history still matters, being approved for a secured loan, such as an auto equity loan, is typically simpler.
Fast cash availability
You may get accepted for an auto equity loan in as little as one business day if you apply online and choose to have the loan funds deposited directly into your bank account.
The following disadvantages include;
Potential automobile repossession
Your vehicle may be taken back and auctioned if you fail to make the payments. A repossession of your car will hurt your credit score and future borrowing capacity.
More debt
It’s always advisable to proceed cautiously when taking on new debt. Even though having debt is often required, taking on a second loan each month could put pressure on your finances.
Requires full coverage insurance
Most lenders demand low-deductible collision and comprehensive insurance. You may not have the necessary insurance if you have paid off the car.
How to Get an Auto Equity Loan
Applying for a car equity loan is comparable to applying for other kinds of loans. Information about your vehicle and any outstanding loans must be provided. The final say on how much you can borrow and how much your automobile is worth will be made by the lender.
Determine the equity in your car
To determine the value of your car, use internet sites such as J.D. Power or Kelley Blue Book. Calculate how much you might be able to borrow by comparing that estimated value to the balance of your current loan.
Verify your credit rating
To view your credit score, use a free credit score provider, your bank, or your credit union. The interest rates you are offered on a loan will be heavily influenced by your credit score.
Examine several lenders
Get offers for vehicle loans from several lenders by completing online forms. Throughout your loan, you may be able to save money by shopping around for the best rates and terms. Recall that not all lenders provide loans for auto equity.
Make a loan application
After deciding which lender best suits your needs, submit the loan application. You will be required to submit financial and personal data, along with details on your vehicle and any outstanding loans.
Final Thoughts
A personal loan secured by the equity in your car is called an auto equity loan. Since equity is equivalent to the vehicle’s market value if you own your car outright, calculating equity is simple. The equity in your car is calculated by deducting the loan balance from the vehicle’s current market value if you have an outstanding auto loan balance.