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An auto equity loan is essentially what it sounds like, it is a loan that uses the equity in your car as security. Auto equity loans are useful for borrowers with poor credit in need of fast cash. However, the ease of obtaining an auto equity loan does come at a cost. But, as with any loan, whether or not the cons outweigh the pros, depends on the consumer in question. To learn more about whether an auto equity loan is right for you, read below to understand what an auto equity loan is, what the requirements are for approval and how it can help or hinder your finances.

Auto Equity Loans Explained

You may have heard of home equity loans before, auto equity loans are very similar except a car is used as collateral instead of a house. With auto equity loans, owning your car entirely is not necessarily a requirement. This means that if other lenders are already using your car as collateral until you pay them what you owe, you can still qualify for an auto equity loan. Finally, the equity is quantified as the market value of the car less any obligations you owe directly related to the car. Usually, the maximum amount a lender will extend is the amount of equity you own in your car.

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. In addition to those with bad credit, auto equity loans are useful to those who are in an emergency and require some quick cash.

Auto Financing 101
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Auto Equity Loan Requirements

Thankfully, you don’t need to worry about your credit score with auto equity loans. That being said, there are some other requirements of auto equity loans that you still should consider before applying. Below are the general requirements of an auto equity loan.

  • Income proof. To ensure that you repay the loan, the lender will usually ask for proof of your income. A few recent pay stubs are adequate proof for lenders.
  • Comprehensive and collision car insurance. The majority of auto equity loan lenders make it mandatory for borrowers to have comprehensive and collision insurance for the duration of your loan’s term.
  • A car registered to your name. The title of your car must have your name on it if you want to borrow against it.

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Pros and Cons

Anytime 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. The pros and cons of auto equity loans are as follows.


  • Relatively longer loan terms. Compared to other options for borrowers with bad credit, auto equity loans have longer terms. This fact makes your loan payments more affordable but you’ll pay more interest.
  • Almost everyone qualifies. Having good credit is generally one of the tougher criteria to meet when it comes to financing. You don’t have to worry about good credit with auto equity loans making it quite easy to qualify.
  • Owning your car isn’t necessary. If you haven’t fully paid off your auto loan to get your car initially, you can still qualify for an auto equity loan.


  • Costly. 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.
  • May lose your car. 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.

Credit Score Required For an Auto Equity Loan

Auto equity loans do not have a credit score requirement. Lenders don’t ask to see your credit score and report because your car is used to secure the loan. If you default on the loan, the lender simply repossesses your car and sells it to cover the loans remaining balance. Since the lender is very safe with the collateral used for an auto equity loan, considering your creditworthiness is not a priority or concern of theirs.

Canadian Credit Score
Check out this infographic for even more information about credit scores.

Are Auto Equity Loans and Vehicle Title Loans The Same?

There are many similarities between auto equity loans and vehicle title loans that many lenders tend to use the two terms interchangeably. 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.

The main feature that differs auto equity loans from vehicle title loans is you need to completely own your car when applying for a vehicle title loan. In addition, vehicle title loans tend to have shorter repayment periods than auto equity loans do.

While auto equity loans and vehicle title loans share many similarities, they are not the same.

Should you repair your car or buy a new one. Check out this article for more information.

Is an Auto Equity Loan The Right Option For Me?

As with all financing options and decisions, it depends entirely on your financial situation and goals. One financing option may be perfect for one individual but wrong for another. That being said, auto equity loans are ideal for people with poor credit who need quick, emergency cash. If this is you, an auto equity loan may be the right choice for you. Although, before making your final decision, be sure to consider all your options and the corresponding pros and cons.

Interested in What Your Other Auto Financing Options Are?

Loans Canada offers a wide variety of vehicle financing options to meet the needs of Canadians all across the country. If you’re in the market to purchase a new or used vehicle or are looking to use your vehicle as collateral to secure a loan, get in contact with us today.

Veronica Ott avatar on Loans Canada
Veronica Ott

Veronica is a writer who specializes in creating unique and educational personal finance content. She has extensive experience writing blog posts for companies in the financial sector. Veronica's background is in accounting as she graduated from Western University in 2017 with a degree in accounting. She is passionate about using her accounting expertise to help others with their personal finance questions and issues and enjoys using her writing to educate Canadian readers. When Veronica is not writing, she enjoys film, reading, travelling, going to the gym, and listening to music.

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