What Is an Auto Equity Loan?
An auto equity loan lets you borrow money by using your car as collateral. Your chances of being approved for the loan (and getting a good rate) are better than with a regular personal loan, but you could lose your car if you don’t pay it back in time.
- Auto equity loan lets you borrow against the value of your vehicle.
- They’re often easier to get and have lower interest rates than unsecured loans.
- But if you default on your auto equity loan, your car could be repossessed.
What is an auto equity loan?
If your car is worth more than the money you still owe on it (if any), then you may be able to take out an auto equity loan against the vehicle.
For example, if your car is worth $20,000, but there’s only $9,000 left to pay on your auto loan, then you can borrow against the remaining $11,000 of “equity” in your car. Some banks will lend you 100% of this equity, while others might only let you borrow up to 50% of the amount.
In a few cases, a lender might offer a loan for more than your car’s equity, but be aware that this will put you upside down on your auto loan, which is a dangerous financial position to be in.
Lenders often have requirements — usually for the age or mileage of the car — in order to use your vehicle for an auto equity loan. Once you get the funds, you can use them for anything you want.
Although they have similar names, auto equity loans and auto title loans are not the same thing.
- Auto equity loans work like a regular auto loan, in which you slowly pay back the money over an agreed time period.
- Auto title loans lend you a fixed sum for a short period of time — typically 30 days or less. They almost always carry higher interest than auto equity loans, and the risk of losing your car to repossession is greater.
Pros and cons of an auto equity loan
Auto equity loans can be a convenient way to get money fast, but they aren’t always easy to find, and you could lose your car if you don’t keep up your end of the deal.
Pros
- Easier qualification: Since the loan is secured by your car, it’s usually easier to get an auto equity loan than a regular unsecured personal loan.
- Lower interest rates: Secured debt (like an auto equity loan) typically has a lower interest rates than other types of financing (like a personal loan or credit card).
- Quick funding: Most auto equity loan companies can process your loan within a day or so.
- Flexible terms: Just like with regular auto loans, equity loans come in a variety of rates and term lengths to suit your needs.
Cons
- Can be hard to find: Equity auto loans are not as common as other types of debt, like personal loans. You may have to shop around to find a lender.
- Risks losing your vehicle: If you can’t make your payments, the finance company might repossess your car.
- Amount may be limited: Usually, you can only borrow a certain percentage of your car’s equity.
- Requires full insurance coverage: Most auto equity lenders require you to have full-coverage car insurance in order to approve your loan.
When is an auto equity loan a good choice?
Here are some situations in which an auto equity loan could be a good move:
- If you need cash but don’t want to sell your vehicle
- If you want a lower rate than you can get with a credit card or personal loan
- If you have a large amount of equity in your vehicle
- If you can afford paying both your original loan and the additional equity loan (if you still owe on your original loan)
How to get an auto equity loan
To get an auto equity loan, you’ll want to check your car’s value and your own credit score before shopping for offers and picking a lender.
Calculate your car equity
You can’t know how much you can borrow until you know how much equity is in your vehicle. Find out your car’s value using a trusted service such as Edmunds or Kelley Blue Book. If you don’t owe anything on the car, then the entire value is your equity. Otherwise, subtract the outstanding balance on your loan(s) to get the net equity.
Check your credit score
Your credit score will usually play a big role in deciding what interest rate you get on your auto equity loan. You have many ways to check your credit score for free, and you can also get a free copy of your credit report to make sure there are no errors holding your score down.
Compare lenders
Take the time to shop around for your loan and get a good deal. You can use an online marketplace and get quotes from many lenders with one application — such as with our list of best car loans. Also try checking with your own bank or credit union, since it may have a discount for customers.
Officially apply for a loan
Once you’ve picked the best lender for your needs, you’ll have to fill out the loan application. The form itself might not take long, but you’ll need to get all your information and documents together first, including details of any existing car loan you have. Check out our car loan documents checklist to make sure you’re ready.
Alternatives to auto equity loans
If an auto equity loan isn’t for you, you still have plenty of other financing options available. Which alternative works best may depend on your situation.
| Alternative options | How it works | Who this may be a good fit for |
|---|---|---|
| Cash-out auto refinance | You take a loan for the current value of your car, with part of it going to pay off your original car loan and the rest going to you as a cash payment. | This can be a good option if you need extra cash, so long as the rate on your new loan is lower than what you’re paying on your original loan. |
| Auto title loans | You use your car as collateral for a flat, short-term loan (often 30 days or less). | Auto title loans are not recommended. The interest is usually very high, and the short term can make it hard to pay off in time. Only consider this if you’re in dire circumstances and certain you can repay the loan with interest. |
| Unsecured personal loans | Instead of using your car as collateral, you can get an unsecured personal loan just based on your good credit. You can use the funds to pay off whatever you still owe on your car (or anything else you need the money for). | If your credit is strong enough to qualify for an unsecured personal loan at a good interest rate, it might be better than an auto equity loan, since it won’t put your car at risk if you default. (Although default causes other problems.) |
| Home equity loans | You use your home’s equity (its value minus what you still owe) to get a loan rather than your car’s equity. These usually have lower rates than auto equity loans, but you’ll be risking your home if you default. | If you have a lot of equity in your home and can handle the payments, this might be a better choice than taking out an auto equity loan. |
| 0% APR credit card | While most credit cards have high interest rates, you might find some offering a 0% transfer rate for a limited time. You could use the credit card transfer to pay off your auto loan and then repay the balance before the 0% period ends. | If you’re sure you can repay the entire amount before the higher rates kick in — usually after 12 to 18 months — this can be an excellent low-cost option. |
| Trade in or sell your car | You can also get the equity out of your car by selling it and keeping whatever’s left after paying any remaining balance on the loan. Or you can trade it in to offset the cost of another vehicle. | If you don’t need your car anymore, then this might be the best option, since you won’t take on any new debt. |