What is an Auto Equity Loan and How Does it Work?
Summary
An auto equity loan allows you to borrow against your car’s value to secure a loan. Learn how it works and the pros and cons to see if it fits your budget.
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If you’re a car owner who needs extra cash to catch up on bills or handle unexpected expenses, you could consider an auto equity loan to help bridge that financial gap. But before you move forward with this type of secured personal loan, it’s important to make sure the loan terms align with your financial situation.
Let’s break down what an auto equity loan is, the pros and cons, and explore some alternatives to help you make the best choice for your budget.
What is an auto equity loan?
Equity is the difference between how much your vehicle is worth and how much you still owe on the current loan. An auto equity loan is a secured personal loan that allows you to borrow money using the paid-off portion of your car’s value as collateral (something of value). You may qualify for an auto equity loan whether you own your car outright or still have an existing loan — but your car needs to be worth more than you still owe to the current lender.
The amount of money you can borrow with an auto equity loan depends on factors, including:
- The value of the vehicle
- How much equity you have
- Your ability to repay the loan
- Your credit history
Once you apply for an auto equity loan, the lender will review your income and credit history, check that the vehicle is registered to you and confirm your car’s value. Many lenders also require you to have full coverage auto insurance when you apply and to keep the policy until you pay off the loan.1 If your application is approved, the lender will provide you with the funds, typically by direct deposit or check.
An auto equity loan is a secured loan. So while it might give you access to the money you need, remember that if you default on the loan, the lender has the right to take possession of your vehicle to recover the amount you owe.
Auto equity loan vs title loan: What’s the difference?
An auto equity loan is based on the equity you have in your vehicle. You also don’t have to own the car outright to take out the loan.
On the other hand, a title loan is a short-term, high-interest loan you take out by using your vehicle’s title as collateral to secure funds. In this case, you usually have to own the vehicle and have a clear title.2 The repayment period is typically around 15 to 30 days.3 In contrast, auto equity loans allow you to stretch out your repayment with longer loan terms.
Like an auto equity loan, if you don’t repay the title loan, the lender has the right to take ownership of your vehicle to recover its losses.
Pros and cons of auto equity loans
Pros
- Higher likelihood of approval: Because an auto equity loan is secured, you could have a better chance of getting approved — and approved for more funds — than with an unsecured loan.
- Lower interest rates: You may qualify for a low interest rate compared to loans without collateral
- Flexible use of funds: You can use the loan for various purposes, like home improvements, medical bills or car repairs.
Cons
- Risk of losing your car: If you fail to pay the loan, the lender can repossess your car to recover the unpaid amount.
- Limited loan size: If you don’t have much equity in your car, you may not be able to borrow enough money to meet your needs.4
- Risk of taking on unwanted or unaffordable debt: Depending on the amount of any car payments you still owe, adding an auto equity loan may not be the best fit for your budget.
Alternatives to an auto equity loan
If you decide that an auto equity loan isn’t right for you, or you haven’t been able to qualify for one, other options are available. Let’s look at a few below:
Unsecured personal loan
An unsecured personal loan provides a lump sum of money you can borrow from a bank, credit union or online lender and repay over time with interest. Personal loans can be secured or unsecured, depending on the lender you apply with, but an unsecured personal loan does not require you to use your vehicle as collateral.
Like a secured personal loan, an unsecured personal loan comes with a fixed interest rate, which means your monthly payments will stay the same throughout the loan term, making it easier to budget with your other monthly expenses.
Ask friends and family for help
If you’re comfortable with doing so, borrowing money from friends and family can be a good alternative to applying for a loan. While it may seem too formal, creating a family loan agreement that outlines all of the details of the loan can help prevent misunderstandings and maintain healthy relationships.
Save up for the expense
While saving may take a bit longer, it helps you avoid falling into debt by taking out a loan or line of credit you may not be able to repay. Saving extra cash can be a good option if you don’t have to pay for an emergency expense. For example, if you’re planning a vacation or a home improvement, you can save monthly or cut non-essential spending to reach your goal.
Home equity loan or home equity line of credit
If you own a home and your lender determines you have adequate equity, you could use it for funding. A home equity loan allows you to borrow a lump sum of money, while a home equity line of credit (HELOC) functions more like a credit card — you borrow as needed up to a certain limit. Both options could come with lower interest rates, but be cautious. Since your home is on the line as collateral, you could lose your home if you’re unable to make your loan payments.
Don’t hit the brakes on your financial goals
An auto equity loan can be a helpful tool, especially when you need a little extra cash. However, it’s best to weigh the pros and cons and explore all of your options to find the one that best fits your needs. With the right plan in place, you can make a choice that supports your goals — without putting your ride at risk.
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This article is for general education and informational purposes, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any purpose and is not intended to be and does not constitute financial, legal, tax, or any other advice. Parties (other than sponsored partners of OneMain Financial (OMF)) referenced in the article are not sponsors of, do not endorse, and are not otherwise affiliated with OMF.
