How to Get an Auto Equity Loan

Auto equity loans aren’t the most common way to borrow money. These loans work in a similar way to home equity loans. However, in the case of auto equity loans, you use the equity you have built up on your vehicle as collateral to secure financing. 

Here’s what you need to know about how auto equity loans work, along with the benefits and drawbacks of these types of loans. You’ll also learn how to get an auto equity loan if you’re interested in this type of financing and some alternative ways to borrow money as well.

How to Get an Auto Equity Loan

1. Review Your Credit

Before you apply for any type of loan, it’s wise to review your credit reports from all three major credit bureaus—Equifax, TransUnion, and Experian. When you apply for financing, the lender is likely to check your credit reports as part of the application process. So, it’s important to know where you stand in advance of any loan applications. If you discover errors on your credit reports, the Fair Credit Reporting Act (FCRA) lets you dispute those mistakes with the appropriate credit reporting agency. 

2. Research Multiple Lenders

With any type of financing, auto equity loans included, it’s wise to compare loan offers from multiple lenders. When you shop around for financing offers you can often discover the best deals available for your situation, including lower interest rates and fees that can save you money. 

3. Assess the Value of Your Car

Next, you’ll want to look up the value of your vehicle to get a better idea of your borrowing potential. An industry guide, such as Edmunds or Kelley Blue Book, can help you here. If you still have an auto loan attached to your vehicle, subtract the remaining loan balance from your vehicle’s value to calculate your available equity. 

4. Apply for an Auto Equity Loan

Once you narrow down your top choice for an auto equity loan, you may be ready to apply. In general, it’s fine to fill out multiple pre-approval requests with lenders that offer this option. These types of applications typically involve soft credit inquiries that will not impact your credit score. But it’s important to limit how many full loan applications you submit since these often require hard credit inquiries that have the potential to impact your credit score in a negative way. 

FICO scores apply special treatment to certain types of credit inquiries when they occur within a 14-day period (45 days with newer FICO scores) for rate shopping purposes. But this special treatment applies to mortgage applications and applications for auto and student loans. Since an auto equity loan may be classified as a type of personal loan, if you apply for several of these loans in a short period of time you might damage your credit score. Therefore, it’s safer to select your preferred lender (and confirm you’re likely to satisfy the lender’s approval criteria) in advance.

5. Repay the Loan

After you take out an auto equity loan, it’s critical to repay your debt according to the terms of your loan agreement. Failure to repay your loan as promised could put your credit history and credit score in jeopardy. Plus, you risk the repossession of your vehicle in this situation since your car serves as collateral for the loan. 

Pros and Cons of Auto Equity Loans

Pros

• Lower interest rates: With secured loans, the lender has an asset to seize if the borrower fails to repay their debt as promised. Since there’s less risk involved for the lender, the interest rates on secured loans (like auto equity loans) are often lower compared with unsecured financing options.
• Larger loan amounts: If you have a large amount of equity available in your car, you might be able to borrow more money than you could with an unsecured loan.
• More lenient approval criteria: Often the approval criteria for auto equity loans may be less strict since the lender is able to reduce its risk with the asset you pledge (aka your vehicle’s equity) to secure the loan.

Cons

• Potential repossession: Your car serves as collateral when you take out an auto equity loan. If you default, the lender can repossess your car to try to recover its losses. 
• Not offered everywhere: Not all lenders offer auto equity financing. (And you should be careful not to confuse these loans with car title loans, which are a predatory type of lending.) In general, auto equity loans are more common at credit unions than other financial institutions.
• Full coverage auto insurance: When your vehicle serves as collateral for a loan (either a car loan or an auto equity loan), the lender will typically require you to carry full coverage auto insurance. This could raise your monthly car insurance premium, and add to your monthly expenses.

Alternatives to Auto Equity Loans

Auto equity loans are one option when you need to borrow money. However, there are plenty of other solutions to consider if you need to secure financing. Here are three alternatives to auto equity loans that might be a better fit for your situation. 

• Home equity loans: A home equity loan or line of credit (HELOC) lets you use the equity you have built up in your home (instead of your vehicle) as collateral to secure financing. With this type of loan you may be able to qualify for a better interest rate and a larger loan amount, depending on your credit score, the amount of equity you have available, and other factors. However, if anything goes wrong and you can’t repay the loan as promised, you risk losing your home to foreclosure. 
• Cash-out auto loan refinance: Another option to consider if you want to borrow against your vehicle’s equity is a cash-out auto loan refinance. With this option, you apply to take out a new loan to pay off your original car loan. If you can qualify, a lender might loan you more than the payoff amount on your original loan and distribute the difference to you in the form of a check or deposit to your bank account. 
• Personal loans: Personal loans can be another versatile borrowing option to consider instead of auto equity loans. If you have very good or excellent credit, you may be able to qualify for competitive interest rates even without providing collateral. There are bad credit personal loans available as well, but you should expect lenders to offer you higher interest rates and less attractive borrowing terms with this type of financing. 

Best Loan Alternatives to Auto Equity Loans

*APRs are accurate as of publication.