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.
A personal loan calculator can help you compare the total cost and payment amounts of multiple loan offers over time.
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
- 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.
- 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
|Lender||APR Range*||Loan Amounts||Loan Term|
|U.S. Bank||8.74%–21.24%||$1,000–$50,000||12–24 months|
*APRs are accurate as of publication.
Learn more about the above lenders and see why we picked them for the top personal loan available today: The Best Personal Loans.
Auto Equity Loans vs. Car Title Loans
On the surface, auto equity loans might seem similar to car title loans. Yet it’s important to understand that there are significant differences between these two types of financing.
Auto equity loans, as described in detail above, are a type of personal loan that use the equity in your vehicle as collateral. A car title loan, on the other hand, is a high-cost installment loan that’s similar to payday and pawnshop loans. Although these loans offer borrowers quick access to cash with little to no credit check, the finance charges can be as high as 300% APR.
According to the Consumer Financial Protection Bureau (CFPB), lenders repossess the vehicles of one in five borrowers who use auto title loans because the borrowers cannot repay their loans in full.
What Is an Auto Equity Loan?
An auto equity loan is a personal loan that you secure with the equity in your vehicle. If you own your vehicle outright, the equity in your car is easy to calculate because it’s equal to the vehicle’s market value. If you have an outstanding auto loan balance, the equity in your vehicle is equal to the current market value of the vehicle minus the balance on your loan.
Some lenders will let you borrow up to 100% of the equity in your vehicle, depending on your creditworthiness and other factors. Other lenders might even let you borrow more than your equity is worth (up to 125%, for example) if you can satisfy borrowing requirements.
How Hard Is It to Get an Auto Equity Loan?
Every lender sets its own approval criteria for auto equity loans. In general, however, this type of secured loan is easier to qualify for compared with unsecured loans because the lender’s risk is lower. If the borrower defaults on their debt, the lender has an asset it can seize and resell in an effort to recuperate some of its losses.
What Are the Interest Rates on Auto Equity Loans?
Interest rates on auto equity loans can differ from one lender to another. Your credit score, credit history, and other factors may also impact the interest rates lenders offer you as well.
Before you accept an auto equity loan, be sure to shop around and compare interest rates from several lenders. And you may want to compare other types of loan offers as well (like home equity loans and HELOCs, cash-out auto refinance loans, and personal loans), to make sure you find the best deal for your situation.
What Credit Score Is Needed for Auto Equity Loans?
Because you secure auto equity loans with the value of your vehicle, you may be able to qualify for financing with less-than-perfect credit. Exact credit score requirements will vary from one lender to the next, so it’s important to research credit requirements before you apply (although this information isn’t always available).
Check your credit reports and credit scores in advance to have an idea of which types of loans might be a good fit for you, and how much you might have to pay. Some lenders may offer pre-approval applications you can complete to check your eligibility and potential rate with only a soft credit inquiry, as well.
Do Auto Equity Loans Affect Your Credit Score?
When you apply for an auto equity loan, most lenders will check your credit report from at least one of the three major credit bureaus. The credit check (aka hard credit inquiry) could have a slight negative impact on your credit score.
If you qualify for a new auto equity loan and the lender reports the account to the credit bureaus (most lenders do), it could impact your credit score in other ways as well. Like other loans, a well-managed auto equity loan could help you build positive credit if you always pay on time. However, if you make late payments or default on your debt, an auto equity loan has the potential to damage your credit score instead.
Experian. "Is a Car Title Loan a Good Idea?"
Consumer Financial Protection Bureau. "Research Finds One-in-Five Auto Title Loan Borrowers Have Their Vehicle Seized."