Auto equity loans are not the most frequent type of borrowing. These loans function in the same way that home equity loans do. In the case of auto equity loans, however, you use the equity in your vehicle as collateral to receive funding.
Here’s everything you need to know about auto equity loans, including their advantages and disadvantages. You’ll also discover how to secure an auto equity loan if you’re interested in this sort of financing, as well as some other options for borrowing money.
How to Apply for an Auto Equity Loan
1. Examine your credit
It’s a good idea to evaluate your credit reports from all three major credit bureaus—Equifax, TransUnion, and Experian—before applying for any form of loan. When you apply for financing, your credit reports will most likely be checked as part of the application process. As a result, knowing where you are ahead of any loan applications is critical. If you uncover errors on your credit reports, you have the right under the Fair Credit Reporting Act (FCRA) to dispute those errors with the appropriate credit reporting agency.
- Read Also: When Should You Avoid Personal Loans?
2. Look into a variety of lenders
Any sort of financing, including auto equity loans, should be compared against loan offers from different lenders. When you browse around for financing offerings, you may frequently find the finest bargains for your scenario, such as cheaper interest rates and fees that can save you money.
A personal loan calculator will assist you in comparing the overall cost and monthly payment amounts of various loan offers over time.
3. Determine the market value of your vehicle
Next, look up the worth of your vehicle to obtain a better understanding of your borrowing capacity. Edmunds or Kelley Blue Book, for example, can be of use here. If you still have an auto loan on your vehicle, deduct the outstanding loan balance from the value of your vehicle to get your potential equity.
4. Obtain an auto equity loan
You may be ready to apply for an auto equity loan once you’ve narrowed down your top choices. In general, it is acceptable to submit several pre-approval requests to lenders who provide this service. These applications often require soft credit queries, which have no effect on your credit score. However, you should restrict the number of full loan applications you submit because these frequently require hard credit inquiries, which can have a negative influence on your credit score.
FICO scores consider some sorts of credit inquiries differently when they occur within a 14-day period (45 days for newer FICO scores) for rate-shopping purposes. This particular treatment, however, does not apply to mortgage applications, as well as applications for vehicle and student loans. 1 Because an auto equity loan is a sort of personal loan, applying for multiple of these loans in a short period of time may harm your credit score. As a result, it’s better to choose your preferred lender ahead of time (and confirm you’re likely to meet the lender’s approval criteria).
- Read Also: A Real Estate Syndication Guide
5. Pay back the loan
When you obtain an auto equity loan, it is vital that you repay your debt in accordance with the conditions of your loan agreement. Failure to repay your loan on time may jeopardize your credit history and credit score. Furthermore, because your car serves as security for the loan, you risk having your vehicle repossessed in this circumstance.
The benefits and drawbacks of auto equity loans
Lower interest rates: In the case of secured loans, the lender has an asset to seize if the borrower fails to return their obligation on time. Because there is less risk for the lender, interest rates on secured loans (such as auto equity loans) are frequently cheaper when compared to unsecured financing options.
Larger loan amounts: If you have a lot of equity in your car, you may be able to borrow more money than you would with an unsecured loan.
More relaxed approval requirements: Because the lender can minimize its risk with the asset you pledge (aka your vehicle’s equity) to secure the loan, approval criteria for auto equity loans are often less stringent.
Possibility of repossession: When you take out an auto equity loan, your car serves as collateral. If you default, the lender may repossess your vehicle in order to recoup its losses.
Not available everywhere: Not all lenders provide auto equity loans. (Also, don’t mix these loans with car title loans, which are a sort of predatory lending.) Auto equity loans are more popular at credit unions than at other types of financial organizations.
Full-coverage auto insurance is often required when your vehicle acts as collateral for a loan (either a car loan or an auto equity loan). This could result in a higher monthly auto insurance premium and additional monthly expenses.
Auto Equity Loan Alternatives
When you need to borrow money, one alternative is auto equity loans. If you need to get financing, there are a variety of additional options to explore. Here are three alternatives to auto equity loans that may be better suited to your needs:
Home equity loans or lines of credit (HELOCs) allow you to use the equity in your home (rather than your automobile) as collateral to receive financing. Depending on your credit score, the amount of equity you have available, and other considerations, you may be able to qualify for a lower interest rate and a larger loan amount with this sort of loan. However, if something goes wrong and you are unable to repay the loan as agreed, you may lose your property to foreclosure.
A cash-out auto loan refinance is another option to explore if you wish to borrow against the equity in your vehicle. You apply for a new loan to pay off your original car loan with this option. If you qualify, a lender may give you more than the initial loan’s repayment amount and transfer the difference to you in the form of a check or a deposit to your bank account.
Personal loans: In addition to auto equity loans, personal loans might be a varied borrowing alternative to explore. You may be able to qualify for competitive interest rates even without providing collateral if you have extremely good or exceptional credit. There are bad-credit personal loans accessible as well, but you should expect lenders to give you higher interest rates and less appealing loan terms.
Car Title Loans vs. Auto Equity Loans
Auto equity loans may appear to be identical to automobile title loans on the surface. However, it is critical to recognize that there are substantial variations between these two methods of financing.
As previously mentioned, auto equity loans are a sort of personal loan that uses the equity in your vehicle as collateral. A car title loan, on the other hand, is a high-interest installment loan comparable to payday and pawnshop loans. Although these loans provide borrowers with instant access to cash with little to no credit check, the finance costs might reach 300% APR. 2
According to the Consumer Financial Protection Bureau (CFPB), one out of every five borrowers who use auto title loans has their automobiles repossessed because they are unable to repay their debts in full. 3
What Exactly Is an Auto Equity Loan?
A car equity loan is a personal loan secured by the value of your automobile. If you own your car outright, your equity is easy to calculate because it is equal to the vehicle’s market value. If you have outstanding auto loan debt, the equity in your vehicle is equal to the vehicle’s current market value minus the loan balance.
Depending on your creditworthiness and other conditions, some lenders will allow you to borrow up to 100% of the equity in your vehicle. Other lenders may even allow you to borrow more than your equity is worth (up to 125%, for example) if you meet the borrowing criteria.
How Difficult Is It to Obtain an Auto Equity Loan?
Each lender establishes its own criteria for auto equity loan approval. In general, however, because the lender’s risk is lower, this form of secured loan is easier to qualify for than unsecured loans. If the borrower fails to pay their debt, the lender has an asset that it can take and resell in order to recoup part of its losses.
What are the auto equity loan interest rates?
The interest rates on auto equity loans can vary from one lender to the next. Your credit score, credit history, and other characteristics may all have an impact on the interest rates that lenders give you.
Before accepting an auto equity loan, browse around and compare interest rates from various lenders. You should also examine alternative loan offers (such as home equity loans and HELOCs, cash-out auto refinance loans, and personal loans) to ensure you get the best price for your scenario.
What is the minimum credit score required for auto equity loans?
Because auto equity loans are secured by the value of your vehicle, you may be able to qualify for financing even if your credit is less than excellent. Exact credit score criteria vary from lender to lender, so it’s critical to understand credit requirements before applying (though this information isn’t always available).
Check your credit reports and credit scores ahead of time to see what types of loans would be a good fit for you and how much you might have to pay. Some lenders may also provide pre-approval applications that you can fill out to assess your eligibility and possible rate with only a mild credit inquiry.
Do auto equity loans have an impact on your credit score?
Most lenders will verify your credit report from at least one of the three major credit bureaus when you apply for an auto equity loan. The credit check (also known as a hard credit inquiry) may have a minor negative influence on your credit score.
If you qualify for a new auto equity loan and the lender reports the account to the credit agencies (most lenders do), it may have other consequences for your credit score. A well-managed auto equity loan, like any other loan, can help you create positive credit if you pay on time every time. An auto equity loan, on the other hand, has the potential to harm your credit score if you make late payments or default on your debt.