An auto equity loan is a financing option that lets you borrow money against the value of your vehicle, using it as collateral. If you own your car outright or have a lot of equity in it, this type of financing can provide you with a sizable amount of money to use for various needs.
Understanding the ins and outs of auto equity loans can help you make a more informed financial decision about whether this financing option is right for you.
Key Points
- An auto equity loan is a type of loan that lets you borrow money against the equity in your vehicle and use it as collateral to secure the loan.
- You can use the funds from an auto equity loan for various purposes, making this type of financing very flexible.
- Your car secures the loan, so it’s at risk of repossession if you stop making payments.
- An auto equity loan also reduces your car’s equity, which can increase your risk of negative equity.
What Is An Auto Equity Loan?
An auto equity loan is a type of secured loan that lets you borrow money using the equity in your vehicle as collateral. This is similar to a home equity loan, in which your home would serve as collateral to secure the loan.
The loan amount you can get with an auto equity loan depends on the car’s value and the remaining balance on your existing car loan. Like any other standard loan, you would receive a lump sum payment, then make regular payments over a set term to repay the loan in full, including interest. You can then use the money for various purposes, including car repairs or debt consolidation.
Generally speaking, auto equity loans are designed for individuals with poor credit or past financial issues. For this reason, auto equity loans are more expensive due to the higher risk to the lender.
Auto Equity Loan Features
| Loan Amount | $500 – $50,000+ (depending on vehicle equity and lender) |
| Interest Rate | 9.99% – 35% APR |
| Term length | 6 months – 5 years |
Caution: It’s important to understand that since your vehicle collateralizes the loan, it’s at risk of repossession if you fail to repay. Further, an auto equity loan can reduce your vehicle equity, which puts you at risk of entering ‘negative equity’ territory, in which you owe more on your car loan than what your car is worth.
Learn more: What Is Negative Equity?
How To Apply For An Auto Equity Loan
To take out an auto equity loan, follow these steps:
Step 1: Find Out Your Vehicle’s Equity
Your equity is calculated by subtracting your outstanding loan balance from your car’s current value. Determine your car’s current market value by using online sources like Canadian Black Book or Edmunds. Then, subtract any remaining loan balance from your car’s value to determine your equity.
Step 2: Verify Loan Eligibility Criteria
Most lenders will require that you have significant equity in your car. Other requirements may include a strong income, low debt, and good credit. Other lenders may focus more on your car’s equity than your credit score.
Find out what your financial and credit profile is like, and match it with a lender with loan requirements you can meet.
Step 3: Research Lenders
Do some comparison shopping to see where you can get the best loan based on your financial and credit health. Using an online loan comparison site like Loans Canada can help you quickly compare lenders side-by-side and check out their interest rates, loan amounts, and repayment terms.
Step 4: Gather Required Documents
To qualify for an auto equity loan, you’ll typically need the following:
- Proof Of Ownership. You’ll need to provide the lender with proof that you actually own the car and that there are no issues with the title of the vehicle.
- Income Source. The lender will want to ensure that you earn enough to cover your auto equity loan payments after all your existing bills have been paid. Proof of income can include documents such as pay stubs and tax receipts.
- Proof Of Residency. This can include things like a utility bill or lease agreement that has your name and address on it.
- Proof Of Identification. The lender will want to verify your identify with documents like a driver’s license or passport.
- Vehicle Insurance. The vehicle should have a valid insurance policy taken out on it.
Step 5: Submit A Loan Application
Complete the lender’s application form in full, including information such as the details of your car, your financial situation, and the loan amount requested.
Step 6: Wait For Loan Approval
If you’re approved for the loan, be sure to review the interest rate, loan term, and repayment schedule. Also, check to see if there are any hidden fees or prepayment penalties.
Step 7: Receive Your Loan Funds
Depending on the lender, funds can be made available anywhere from a few hours to a few days.
Pros And Cons Of An Auto Equity Loan
Any time you make a financial decision, you should consider the advantages and disadvantages of each option. Once you understand the pros and cons, compare them against your financial situation and goals to reach a conclusion.
Pros Of An Auto Equity Loan
Auto equity loans offer several benefits, including the following:
- Longer Loan Terms. Auto equity loans can offer longer loan repayment terms compared to other financing options, like payday loans. This gives you more time to repay your loan, keeping your monthly payments within budget.
- Flexible Eligibility Criteria. Having good credit is generally one of the tougher criteria to meet when it comes to financing. But good credit may often not be required to qualify for an auto equity loan since it’s secured by your vehicle. This makes this type of financing more accessible for bad credit borrowers.
- Quick Access To Funds. Many lenders approve auto equity loans quickly, making them ideal for consumers in need of covering an emergency expense.
- Higher Loan Amounts (Depending On Equity). If you have a lot of equity on your vehicle, you may be able to access a higher loan amount compared to an unsecured personal loan.
Cons Of An Auto Equity Loan
Along with the perks of an auto equity loan are some drawbacks to consider:
- Higher Interest Rates. Auto equity loans are not the cheapest way to finance out there. The interest rates are often higher. But, keep in mind that compared to other bad credit options like payday loans, an auto equity loan is more affordable.
- Risk Of Vehicle Repossession. In the event that you default on the loan, you will lose your car to the lender. Many need their car for school, work or merely to live, be sure to consider how important your car is before risking losing it.
- Risk Of Negative Equity. Borrowing from your car reduces its equity, which can be risky if the car depreciates quickly, leaving you with a car loan that’s higher than your vehicle’s value.
What Credit Score Is Required For An Auto Equity Loan?
Auto equity loans often do not have a credit score requirement. While some lenders may conduct a credit check, others may not. And even if a credit inquiry is performed, some lenders may be fine with lower credit scores, as long as your car value and income are high enough.
So, auto equity loans may an ideal financing solution for those with both good and bad credit. Just remember that applying with a bad credit score could result in a higher interest rate, which can make your loan more expensive.
Are Auto Equity Loans And Vehicle Title Loans The Same?
Auto equity loans and vehicle title loans are both quick financing options which use the value of your car as security and do not require good credit to qualify. However, there are differences to understand:
| Auto Equity Loan | Car Title Loan | |
| What It Is | A loan that lets you borrow against your vehicle’s equity while still making car loan payments. | A loan where you use your fully paid-off car as security for financing. |
| Car Ownership | You can still have a balance remaining on your car loan. | You must fully own the vehicle with no outstanding loan balance. |
| Risk Of Repossession | Possible if payments aren’t made. | Possible if payments aren’t made. |
| Best For | Borrowers who still owe a balance on their car. | Borrowers who own their vehicle outright. |
Learn more: Car Title Loans: How To Borrow With Your Car
Is an Auto Equity Loan The Right Option For Me?
An auto equity loan may be worth considering under certain circumstances, but it may not be suitable in others.
| Consider An Auto Equity Loan If … | Auto Equity Loans May Not Be Suitable If … |
| You have enough equity in your car. | You’re getting close to negative equity. |
| You have bad credit and can’t qualify for other loan types. | You’re using the loan for non-essential expenses. |
| You want a lower-rate alternative to payday loans or credit cards. | Your vehicle is depreciating quickly. |
| You want a flexible repayment plan. | You can qualify for a lower-rate loan. |
| You want to keep your car. | You’re planning to sell your car shortly. |
| You’re confident in your ability to make additional loan payments. | Your income isn’t strong enough to warrant additional loan payments. |
Final Thoughts
If you own a vehicle and need extra cash, an auto equity loan can be a valuable financial tool to consider. It may be easier to qualify for compared to unsecured loans, and may provide you with a sizable loan amount f you have a large expense to cover. However, you’ll be reducing your car’s equity, and putting your vehicle at risk of repossession if you fail to keep up with loan payments. Be sure to weigh the benefits and risks before opting for an auto equity loan to cover your financing needs.
