What is an Auto Equity Loan?
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Emergencies happen and sometimes you need cash quickly. Unless you have an emergency fund on hand, you may need to lock down a loan to make it through the emergency.
If you own a vehicle and need cash, then an auto equity loan may be an option for you. Some lenders, including credit unions, can offer these kinds of loans.
What is an auto equity loan?
An auto equity loan allows you to secure a loan based on the current value of a car that you own. If you do not have the title in hand, then this is not an option for you. Similar to a home equity loan, an auto equity loan allows you to borrow money against the value of your car. If you take out an auto equity loan, you’ll be required to repay the loan with interest.
An auto equity loan is a type of secured loan. Secured loans use your property as collateral. For example, a home equity loan uses your house as collateral and an auto equity loan uses your car as collateral. Leslie Tayne, a New York-based financial lawyer with almost 20 years of experience in the debt relief space, reminded potential borrowers, “It makes sense to seek an auto equity loan if you have enough equity in the car to fund the loan.” However, she warns, that this type of loan is not very common.
Secured loans carry all kinds of risks. If you don’t keep up with your payments, then the lender may have the right to repossess your property. When you take out an auto equity loan, you run the risk of having your car repossessed if you don’t pay. Losing your car could significantly impact the way you earn a living, so the stakes of taking out an auto equity loan are high.
Before you consider taking out an auto equity loan, you should weigh your options carefully.
Benefits of an auto equity loan
An auto equity loan comes with risks, but there are several benefits as well.
- Lower interest rate than an unsecured loan. With a secured loan, you are putting your property on the line. Because the lender has a physical asset that it can repossess, you may get a lower interest rate. With an unsecured payday loan, the loan is riskier for the lender so you will likely have to pay a higher interest rate.
- Repayment options. Typically, your auto equity loan will be a very short term that could range from 30 days to a few months. Many lenders may give you the option of extending your loan terms. However, you should be prepared to pay more fees.
- Easy to qualify. If you are the sole owner of a car with a positive equity position, then you will likely be able to qualify for an auto equity loan. If you owe more money on your car than it is worth already, then you will not be able to pursue an auto equity loan.
- Quick access to cash. The process can take as little as one business day, which is less time than many other kinds of loans, such as a home equity line of credit that can take two to four weeks.
Downsides of an auto equity loan
While there are plenty of upsides to getting an auto equity loan, there are some considerable downsides to be aware of. They include:
- Car repossession for nonpayment. If you default on your payments, you could lose your car. The consequences of losing your car can be tremendous, especially if you rely on it to get to work.
- Increases your personal debt. Taking on debt as a way to have cash on hand is not always the best option for the long term. Although you will have liquidity in the short term, you will have to reconcile that with repaying your debts.
- Early repayment penalties. Some lenders will charge you a fee for repaying your loan early. Penalties will vary widely by lender, so make sure to ask about any prepayment penalties. Even if you aren’t sure that you would be able to repay the loan early, consider this while shopping around.
- Need for increased insurance coverage. Most lenders will require that you have comprehensive and collision car insurance if you plan to secure your loan with your car. In some states like Florida, you may only be required to have personal injury and damage liability insurance without collision or comprehensive. You may only have liability or personal insurance on your car for a number of reasons, so consider this in the cost of your loan.
- Negative impacts to your credit score. Tayne warned, “an auto equity loan will show up as a debt on your credit report, which can lead to a bad mark on your credit report.” As with any loan, there can be negative repercussions when you take out an auto equity loan.
How to get an auto equity loan
Once you decide that you want to get an auto equity loan, you will need to shop around for a lender. When shopping around for your loan, remember to be aware of a variety of factors.
- Every lender has different terms. Check them closely before signing on the dotted line.
- You should consider the different fees and repayment plans before you attempt to obtain a loan.
- Be realistic about the loan amount you need. Many lenders have minimum loan requirements of several hundred dollars that may require you to take out more money than you actually need to make it through the emergency. The minimum loan amount will vary by lender, but the amount of equity you have in the car will significantly affect the loan amount that you are allowed. Most lenders use Kelley Blue Book to determine the value of your car.
Many larger banks like Chase do not offer auto equity loans. However, several smaller banks do offer these loans. Check with local banks in your area to see if they can offer you an auto equity loan.
Credit unions may also be able to offer you an auto equity loan. One great thing about pursuing an auto equity loan through a federal credit union is that most interest rates are capped at 18%. Although state-chartered credit unions may have higher rates, they can still be a good place to look for affordable auto equity loans.
Finally, you can look into online lenders, such as OneMain Financial and Finova Financial for an auto equity loan. However, you should be aware that these online lenders offer higher interest rates, which means you’ll be paying more. Some online lenders charge nearly 36% on their loans, so make sure you can afford the payments before taking out a loan.
Alternatives to auto equity loans
Securing an auto equity loan may not be the solution to your financial emergency. Although you will have more liquidity in the short term, you will need to repay the loan or pay the penalty. You do have other options to consider before deciding on an auto equity loan.
Use your car to build a side hustle
If you have a car and you are in need of cash, then you might want to consider one of the many side hustles that involve using your car. You could try driving for Uber, Uber Eats, Lyft, or a local pizza place. Get creative to bring in the cash you need without a loan.
Sell your car
If you do not need your car for essential tasks like work or school, then consider selling it. This is an especially good option if you live in a walkable area with ample public transportation.
Auto title loans
An auto title loan is another way to obtain a secured loan quickly. The lender would take the title of your car as collateral. Typically, these are short-term loans that can appear similar to payday loans. Many lenders set up your final payment for approximately 30 days later. You will likely be faced with high fees and an astronomical interest rate that can be as high as 300%.
Auto title loans force many borrowers to extend their loans in a deadly cycle that can sink you further into debt. According to a 2016 study by the Consumer Financial Protection Bureau, 83% of borrowers take out a similar loan the same day that they pay the loan. Essentially, they are extending the debt cycle for another term. Unfortunately, it can be difficult to break this pattern of debt but many are left without other options.
Refinancing your auto loan
One other option for getting cash quickly is to look into a cashback auto refinancing loan, but it’s crucial to know what you are getting into when opting for one of these loans.
A cashback auto refinancing loan gives you cash back out of the equity you have in a car you own. You can use the cash you get for anything you like, but there are a few things you should be aware of before jumping into this kind of loan. First, it’s important to find a cashback auto refinancing loan that reduces your interest rate, and potentially your monthly payment. You don’t want to take on an additional debt burden and dig yourself into a deeper hole.
Second, know that the lender could repossess your car should you fail to pay the loan back in time, leaving you with no personal transportation. This could be problematic if you use your vehicle to travel to work or to pick up family members.
Cash-out or cashback auto refinancing loans add to the loan amount you already have. That means that you’ll likely have payments for a longer period of time and will end up paying more in the long run. There’s also a good chance that you could end up underwater on your auto loan since you are taking on more debt. If your car is totaled in an accident, you may have to pay the insurance company instead of the other way around.
If you are struggling to keep up with your auto loan payments, you should consider traditional refinancing. Many lenders can work with you to lower the payments or provide a lower interest rate. It could be a more long-term solution to your tight financial situation.
The bottom line
At some point in your life, an emergency will arise. If you do not have an emergency fund on hand, then you will need to find a way to get some cash. An auto equity loan can be a good short-term solution, but you should take the long-term repercussions into consideration.
Look carefully at your different loan options and shop around with lenders. Make sure to find the auto equity loan that suits your needs before you jump in.
The information in this article is accurate as of the date of publishing.