- What is an auto equity loan?
- What you should know about auto equity loans
- Where can I have an auto equity loan?
- Alternatives to auto equity loans
What is an auto equity loan?
An auto equity loan is a type of secured loan that allows you to take a loan from the value of your vehicle, often whether you own it outright or have some equity in your car. Loan amounts will depend on factors like just how much equity you've in your car, its fair market value, your income and credit.
To apply, you will need to fill out an application and provide information regarding your car's value and just how much equity you've inside it. If approved, the money may be deposited to your bank account as soon as the same day, depending on the lender.
You may sometimes see lenders use the term auto equity loan and title loans interchangeably, but they are different – make sure to seek advice from the lender if you're unsure. To get a title loan, you'll usually have to possess a free and clear title – meaning there aren't any liens or other encumbrances on the title.
What you must know about auto equity loans
You should carefully compare the costs associated with an auto equity loan with any potential benefits for your situation.
Auto equity loans can get expensive
Aside from interest costs, some auto equity loans come with DMV lien fees and documentary stamp tax fees. These may be included included in the loan, meaning you'll pay interest in it over time. Your apr, or APR, should reflect any fees.
You can become upside down on your loan
When you are taking out a car equity loan, you're contributing to anywhere you already owe there are already paid off the automobile. Because cars depreciate in value with time, you may end up owing more about the car than it's currently worth. That's also known as being upside down on your auto loan, also it may mean you generate losses if you try to sell or exchange your automobile.
You risk repossession
Missing payments in your loan could worsen your financial situation. The lender could repossess your vehicle, which can be your main source of transportation. And if the lender reports the repossession or your missed payments towards the credit agencies, your credit ratings might be negatively affected.
Benefits of auto equity loans
Although auto equity loans might be risky, it comes with an upside. They allow you to tap a resource of money that can be critical in emergencies. They're also often easier to qualify for compared with traditional loans since your car acts as collateral. And they will come with longer terms minimizing rates of interest than other loans targeted at people with poor credit, like pay day loans.
Where can one get an auto equity loan?
Some from the largest U.S. banks – like Wells Fargo, Bank of America, Citibank and Chase – don't offer auto equity loans. However, you might be able to locate them at other lenders like credit unions an internet-based lenders.
The terms of your auto equity loan will depend on your credit history, income and also the worth of your car. Keep this in mind when you are shopping around: 36% may be the maximum of what is considered an affordable interest rate, based on a report in the National Consumer Law Center.
If you apply to have an auto equity loan, the lender will typically look at your car's worth and verify just how much equity you've. The lender could also check that the car is registered in your name, ask for proof of income and wish that you have collision and comprehensive car insurance.
Alternatives to auto equity loans
In an economic emergency, it might be hard to find a fast loan with affordable terms. See if these other options will make more financial sense for you personally.
- Auto loan refinance: If you are can not make monthly payments, you may want to consider refinancing your vehicle loan. You may pay less through getting a lesser interest rate.
- Unsecured personal loan: These loans aren't secured by collateral, so you may pay higher interest compared to a secured loan. However, you won't be in danger of losing your property if you cannot make payments.
- Payday alternative loans: These small-dollar loans are offered through federal lending institutions and come with consumer protections just like a cap on fees, a ceiling on interest rates and term lengths ranging from one to Twelve months.
- Borrowing from family: Even though it might be hard to approach a relative for a financial loan, it may be better financially than getting a risky loan. But before you take a loan, discuss expectations, like a payment per month plan and deadline.
- Bill extensions: If you're behind in your bills, contact the organization and explain your circumstances. It could grant you an extension for a short period of time if it believes you're acting in good faith and also the situation is temporary.
Bottom line
Auto equity loans let you borrow from the value you have in your car. But like with any secured loan, you risk losing that collateral and your credit going for a hit if you can't make payments on time. This is exactly why it's probably best to begin using these loans only in a financial emergency – after you have exhausted all other options.
