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Auto Equity Loan

Christine Spencer

Auto Loan Expert

An auto equity loan operates in much the same way as a home equity loan. It allows you to borrow against the value of your vehicle and repay the loan with interest. The majority of consumers turn to these types of loans during short-term financial emergencies when they need access to quick cash. The amount that can be borrowed and the interest rate vary based on the borrower’s credit history, credit score, and the current value of the vehicle. It is possible to obtain an auto equity loan even if you still owe on your vehicle provided that the value exceeds the amount owed.

Who Offers Auto Equity Loans?

Auto equity loans are typically offered through small community banks or local credit unions. Bank of America, Wells Fargo, Citibank, Chase, and other large nationwide banks do not offer these types of loans. There are also lenders that do online auto loans and that provide auto equity and other types of secured loans, but they often charge higher interest rates and fees than local banks and credit unions.

What Is the Difference Between Auto Equity Loans and Car Title Loans?

Car title loans are similar to payday loans and typically do not require a credit check. The borrower is required to provide the lender with a car title that is free of any liens. The lender maintains possession of the title until the loan is repaid in full. Unlike auto equity loans, which may have a repayment period of several years, car title loans can have a repayment period as short as 30 days. They also come with exorbitant interest rates and fees, which increases the risk of default and can lead to an ongoing cycle of debt.

Dangers of Auto Equity Loans:

Since they have such high interest rates and fees, auto equity loans are an expensive and risky proposition that should only be considered in emergency circumstances. Since your vehicle secures the loan, you run the risk of having your vehicle repossessed in the event that you should default. This can interfere with your ability to work and attend school, which can exacerbate an already bad situation. Negative payment history may also be reported to the credit bureaus and lower your credit score.

Alternatives to Auto Equity Loans:

Before you take out an auto equity loan, you should consider other options for raising the funds that you need. The following are a few examples to get you started:

  • Re-evaluate your budget and eliminate unnecessary expenditures. For example, you can take your lunch to work instead of eating out every day or skip the coffee shop in favor of bringing coffee from home.
  • Be honest with your creditors by letting them know that you are struggling before you get behind. They may be willing to work with you by adjusting your payment terms at least temporarily.
  • Contact a free or low-cost credit counseling company. These organizations can help you prepare a realistic budget and renegotiate repayment schedules with your creditors.
  • Speak with your bank or credit union about other options for short-term loans. It may even be possible to take out a small cash advance on your credit card at a more favorable rate than an auto equity loan.
  • If you credit score has improved or car loan interest rates have dropped since you took out your original car loan, you may want to consider refinancing. This can lower your monthly payment and free up the necessary cash.
  • Regardless of the type of loan, you should always do some comparison shopping. Speak with several lenders to find the one with the lowest fees and interest rate.

Finally, it is important that you consider the issue of insurance. Most lenders will require you to show proof of comprehensive and collision coverage before approving an auto equity loan. If you have pared down your coverage to liability only, the increase in your premium may offset any benefit from the loan or create an additional financial problem down the road.