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A personal loan allows you to borrow money without any security — but with an auto equity loan, you can borrow money against the value of your car. And while having a secured loan can mean a lower interest rate, you will need to consider the advantages and risks that come with an auto equity loan before taking one out.
What an auto equity loan is
An auto equity loan is a variation of a personal loan. You can use the funds for any purpose, provided there is equity in your vehicle.
Auto equity loans allow you to borrow money against the value of your car. If your car is worth $25,000 and you have a loan balance of $10,000, you have $15,000 worth of equity that you can potentially borrow against. With an auto equity loan, you can borrow up to 100 percent of the equity in your car, up to a specified limit.
Because the loan is secured by your vehicle, it’s likely you will be able to get a lower rate than a normal personal loan. However, because your car will be used as collateral, it is at risk of repossession if you don’t make your payments on time.
Auto equity loan vs. car title loan
A car title loan is a short-term loan that uses your vehicle as collateral. More often than not, car title loans are much more expensive than auto equity loans. In comparison, auto equity loans often have longer terms and lower interest rates.
Benefits of an auto equity loan
An auto equity loan can come with a number of benefits.
- Faster approvals. For those with bad credit, an auto equity loan can mean quick approval. Because you can use the equity in your car as collateral, the bank can ensure that it’s getting its money back.
- Larger loans. As with any equity loan, the amount you can borrow is partially determined by how much equity you have in your car. Someone with a $10,000 car and $5,000 in equity could get up to a $5,000 loan, for example, while someone with a less valuable car might not be able to get a loan at all.
- Low interest rates. The interest rate you receive on an auto equity loan is directly connected to your credit score and the value of your car. That means if your car is worth a lot, you may be able to get a good rate, even with less-than-perfect credit.
Drawbacks to an auto equity loan
There are also some drawbacks to taking out an auto equity loan.
- Vehicle is collateral. An auto equity loan uses your car as collateral. This means, if you stop making payments, the lender can repossess your vehicle to recoup its losses.
- Hard to find. Auto equity loans are not common. If you are looking to get an auto equity loan, check with your bank or credit union first. They may offer the service, or they may have a partner they can connect you with.
Who an auto equity loan is best for
An auto equity loan may be right for you if you meet the following:
- You have equity in your car. The most important part of being a good candidate for an auto equity loan is having enough equity to take a loan out against.
- You can afford payments. Since your car will be on the line, it’s important to know that you will be able to make payments every month. If you don’t, your vehicle could be repossessed. This can especially be a problem if you need the car on a daily basis.
- Interest rates may be lower than what you’re currently getting. If the interest rates for an auto equity loan are lower than traditional personal loans and other credit options, it may make sense to opt for this uncommon loan type than something more readily available.
Alternatives to an auto equity loan
If you can’t get an auto equity loan or if the application process isn’t going as smoothly as you would like, you may want to consider loan options that don’t require your car.
Much like an auto equity loan, a home equity loan relies on you having equity in your house. Typically, you can borrow up to a percentage of the equity you have or a predetermined cap. If you own your home, this may be a viable alternative.
Personal loans are a solid alternative choice to an auto equity loan, but the rates will likely be a bit higher since they aren’t secured. The process for getting a personal loan is similar to that of getting an auto loan and can be done in person or online with a variety of lenders.
While they are an alternative, credit cards are usually much more expensive than a personal loan or secured loan. They are, however, also easier to qualify for and you could have instant access to the credit upon approval.
An auto equity loan could be a good idea if you are in the market for a loan at a low rate. But it’s important to budget accordingly, as your vehicle will be at risk if you can’t make payments.