If you’re experiencing tough financial times due to COVID-19, an auto equity loan can give you the flexibility you need to make it through challenging circumstances. For example, if you need money for an unexpected expense such as a medical bill, the loss of a job, or a home repair, a car equity loan can give you access to funds quickly and easily. A variety of different lenders, including banks and credit unions, may offer auto equity loans.
What is an auto equity loan
An auto equity loan allows borrowers to take out a loan based on the value of their automobile. Similar to a home equity loan, auto equity loans allow car owners to borrow based on the amount of equity they have built up in their vehicles. Borrowers must have the title in hand to qualify for an auto equity loan.
These types of loans may be easier to qualify for than other types of secured or unsecured loans. When you take out this type of loan, you’ll be paying back the balance with interest, so it usually only makes sense if you need the money. However, auto equity loans generally have lower rates than payday loans and other types of predatory lending, making them a good option if you’re in a pinch.
An auto equity loan is a type of secured loan, which uses your vehicle as collateral. If you default on an auto equity loan, you face the risk of your car being repossessed by the lender. Also, if you haven’t already paid off your initial auto loan, you may be faced with a growing debt burden that can be difficult to pay off in full.
Best auto equity loan options
1. Credit unions often offer auto equity loans. You should check with your local credit union to see if it offers auto equity loans. In most cases, you’ll need to become a member of the credit union before you can apply for a loan. Credit unions are not-for-profit, which means that they put the interest of their members above that of shareholders or other parties.
2. Finova Financial is an online lender that specializes in auto equity loans. It features an easy online application process, and borrowers can have funds deposited into their account the same day their application is accepted. Finova has a 30% maximum APR and a loan term of 12 months. While it doesn’t charge a prepayment fee, it does charge a variety of other fees, including a DMV Lien Fee and a Document Stamp Tax.
3. OneMain Financial also offers auto equity loans in the form of a cash-out refinance loan. The amount of the loan is based on how much equity you’ve built up in your vehicle and features a fixed interest rate and no prepayment fees. Borrowers can apply online or at a OneMain Financial branch location.
4. Mariner Finance also has an auto equity loan in the form of an auto refinance loan. The lender features an easy online application process as well as a 15-day money-back guarantee. Borrowers can prequalify online with no impact to their credit score, and Mariner Financial will walk you through every step of the application process.
How to qualify for an auto equity loan
To qualify for an auto equity loan, you must own a car and have the title. It’s OK if you don’t own the car outright and still have a remaining balance on an existing auto loan — you can still qualify for an auto equity loan even if you haven’t paid off your original auto loan in its entirety. In general, however, you should have to build up enough equity in your car that it makes sense to borrow against, so borrowers who have only recently purchased an automobile may not qualify.
Auto equity loans are usually easier to qualify for than unsecured personal loans, and even borrowers with poor credit may qualify. This is because auto equity loans are secured based on the value of your car, and lenders can repossess your car if you fail to pay. The best auto equity loans for bad credit still come with reasonable rates and fees.
Pros and cons of getting auto equity loans
While auto equity loans do have some benefits, there are also a variety of risks associated with taking out a loan and using your car as collateral.
Pros of auto equity loans
- You may be able to get a lower interest rate than another type of loan.
- Because you’re using your car as collateral, auto equity loans tend to be easier to qualify for.
- If you’re experiencing a financial emergency, auto equity loans are a quick way to get the cash you need in hand.
Cons of auto equity loans
- Since you’re using your car as collateral, you run the risk that your vehicle will be repossessed if you’re unable to pay on time.
- Auto equity loans may require increased insurance coverage.
- If you’ve already taken out a loan to purchase your car, an auto equity loan further adds to your debt burden and may be difficult to pay off over the long term.
- If your loan amount ends up being greater than the value of your car, you’ll have a negative equity car loan, meaning that you’ll still end up owing money even if you were to sell your car.
Who should get an auto equity loan
If you need fast cash and don’t think you’ll qualify for other borrowing options, an auto equity loan is a better choice than a payday loan. Interest rates are lower for auto equity loans than loans from predatory lenders and can give you the funds you need in a pinch. However, if you have other borrowing options, an auto equity loan may not be the best fit. You may be able to secure more favorable rates and terms through a personal loan or another type of loan. Since an auto equity loan puts your car at risk, it’s generally only a good option as a last resort.
How does it affect your car insurance?
If you take out an auto equity loan, you may have to upgrade your car insurance to include comprehensive and collision coverage if your insurance doesn’t already include them. This is because the loan is secured using the collateral of your car — if you get into an accident, lenders still want to have the option of seizing the collateral if you fail to make payments.
Too long, didn’t read?
Auto equity loans are a good choice if you’re in a pinch and have already built up equity in your car. However, borrowers with good credit may be able to get better rates on a personal loan. In general, we recommend auto equity loans as a last resort when you need fast cash during a financial emergency.
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