Diksia.com - If you need cash fast and have equity in your car, you might be tempted to take out a loan against your car. But what are the pros and cons of this type of financing? And how do you find the best deal for your situation? In this article, we’ll explain everything you need to know about auto equity loans, including how they work, where to get them, and what to watch out for.
What is an auto equity loan?
An auto equity loan is a type of secured personal loan that uses the equity you have in your car as collateral. Equity is the difference between the market value of your car and the amount you owe on it. For example, if your car is worth $15,000 and you still owe $10,000 on it, you have $5,000 in equity.
An auto equity loan allows you to borrow a percentage of your equity, usually up to 90%. So, if you have $5,000 in equity, you could borrow up to $4,500. The loan amount will also depend on other factors, such as your income, credit score, and the lender’s policies.
Unlike a car title loan, which requires you to have a clear title (no liens or other encumbrances) on your car, an auto equity loan can be taken out even if you’re still paying off your original car loan. However, you’ll still have to make payments on both loans until they’re paid off.
How does an auto equity loan work?
An auto equity loan works similarly to other types of loans. You’ll have to fill out an application and provide information about your car, such as its make, model, year, mileage, and condition. You’ll also have to provide proof of income, identity, and residence. The lender will then appraise your car and determine its value and your equity. Based on that, they’ll offer you a loan amount, interest rate, and repayment term.
The interest rate on an auto equity loan can vary widely depending on the lender, your credit, and the state you live in. Some lenders may charge as low as 10% APR, while others may charge as high as 36% APR or more. The repayment term can also range from a few months to a few years, depending on the loan amount and the lender.
Once you accept the loan offer, you’ll have to sign a loan agreement and hand over your car title to the lender. The lender will place a lien on your title, which means they have the right to repossess your car if you default on the loan. You’ll also receive the loan funds, either by check, direct deposit, or cash.
You’ll then have to make monthly payments on the loan, which will include both principal and interest. Some lenders may also charge fees, such as origination fees, late fees, or prepayment penalties. Make sure you read the fine print and understand all the costs and terms of the loan before you sign.
Where can I get an auto equity loan?
There are many lenders that offer auto equity loans, both online and offline.
Some of the online lenders include:
- LendingTree: LendingTree is an online marketplace that connects you with multiple lenders that offer auto equity loans. You can compare offers from different lenders and choose the best one for you. LendingTree also provides helpful resources and tools, such as calculators, articles, and reviews, to help you make informed decisions.
- OneMain Financial: OneMain Financial is an online lender that specializes in personal loans for people with bad or fair credit. You can apply for an auto equity loan online or at one of their branches. OneMain Financial offers loans from $1,500 to $20,000, with interest rates from 18% to 35.99% APR and terms from 24 to 60 months.
- Finova Financial: Finova Financial is an online lender that offers car equity loans, also known as car equity lines of credit (C-LOC). You can borrow up to 50% of your car’s value, with interest rates starting from 17% APR and terms up to 12 months. Finova Financial also claims to have no prepayment penalties, no hidden fees, and no credit checks.
Some of the offline lenders include:
- Credit unions: Credit unions are nonprofit financial institutions that offer various products and services to their members, including auto equity loans. You may be able to get a lower interest rate and more flexible terms from a credit union than from other lenders. However, you’ll have to join a credit union that you’re eligible for, which may have certain requirements, such as your location, occupation, or affiliation.
- Banks: Banks are traditional financial institutions that offer a wide range of products and services, including auto equity loans. You may be able to get a higher loan amount and a longer repayment term from a bank than from other lenders. However, you’ll also have to meet stricter criteria, such as having a good credit score, a steady income, and a low debt-to-income ratio.
- Pawn shops: Pawn shops are businesses that offer short-term loans in exchange for your valuables, such as your car. You can get a loan based on a fraction of your car’s value, usually up to 25%. You’ll also have to pay a high interest rate, typically around 25% per month, and a storage fee. If you fail to repay the loan within the agreed-upon period, usually 30 days, you’ll lose your car.
What are the pros and cons of auto equity loans?
Auto equity loans have some advantages and disadvantages that you should weigh before taking one out. Here are some of them:
Pros
- Easy to qualify: Auto equity loans are easier to qualify for than unsecured loans, since your car acts as collateral. You don’t need to have a good credit score or a high income to get approved. As long as you have enough equity in your car and can afford the payments, you have a good chance of getting a loan.
- Fast and convenient: Auto equity loans are fast and convenient to get, especially if you apply online. You can get an instant decision and receive the funds within the same day or the next business day. You can also keep driving your car while you repay the loan, as long as you don’t default.
- Lower interest rate than other options: Auto equity loans may have a lower interest rate than other options, such as payday loans, title loans, or credit cards. This can help you save money on interest and pay off the loan faster.
Cons
- Risk of losing your car: The biggest drawback of auto equity loans is the risk of losing your car. If you miss a payment or default on the loan, the lender can repossess your car and sell it to recover their money. This can leave you without transportation and make it harder to find another loan or a job.
- High cost and fees: Auto equity loans can be expensive, especially if you have a high interest rate, a long repayment term, or a large loan amount. You may also have to pay fees, such as origination fees, late fees, or prepayment penalties, that can add to the cost of the loan. You may end up paying more than the value of your car or more than you borrowed in the first place.
- Negative impact on your credit: Auto equity loans can have a negative impact on your credit, especially if you miss a payment or default on the loan. The lender will report your payment history to the credit bureaus, which can lower your credit score and affect your ability to get future loans or credit cards.
How to choose the best auto equity loan for you?
If you decide to take out an auto equity loan, you should shop around and compare different offers from different lenders.
Here are some tips to help you choose the best auto equity loan for you:
Check your credit score and report
Before you apply for an auto equity loan, you should check your credit score and report to see where you stand. You can get a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year at AnnualCreditReport.com. You can also get your credit score for free from various sources, such as Credit Karma, LendingTree, or your bank or credit card issuer. Knowing your credit score and report can help you understand your chances of getting approved and the interest rate you can expect to pay.
Calculate your car equity and loan amount
You should also calculate how much equity you have in your car and how much you need to borrow. You can use online tools, such as Kelley Blue Book or J.D. Power, to estimate your car’s value. Then, subtract the amount you owe on your car from its value to get your equity. You should also consider your income, expenses, and budget to determine how much you can afford to borrow and repay. You should only borrow what you need and what you can comfortably pay back.
Compare multiple offers
You should compare multiple offers from different lenders to find the best deal for you. You should look at the loan amount, interest rate, repayment term, fees, and other terms and conditions of each offer. You should also check the reputation and reviews of the lenders, as well as their customer service and support. You can use online platforms, such as LendingTree, NerdWallet, or Bankrate, to compare and contrast different auto equity loan offers and find the best one for you.
Read the fine print and ask questions
Before you sign the loan agreement, you should read the fine print and ask questions if anything is unclear. You should understand all the costs and terms of the loan, such as the interest rate, fees, repayment schedule, prepayment penalties, and default consequences. You should also know your rights and responsibilities as a borrower, such as how to make payments, how to contact the lender, and how to dispute any errors or complaints.
Keep track of your payments and balance
After you get the loan, you should keep track of your payments and balance. You should make your payments on time and in full to avoid late fees, interest charges, and negative marks on your credit. You should also check your balance regularly and see how much you still owe. If possible, you should try to pay off the loan early and save money on interest. However, you should also check if the lender charges any prepayment penalties or fees for doing so.
Alternatives to auto equity loans
Auto equity loans are not the only option for borrowing money against your car. There may be other alternatives that are cheaper, safer, or more suitable for your needs.
Some of the alternatives include:
Refinancing your car loan
Refinancing your car loan means replacing your existing loan with a new one, usually with a lower interest rate, a longer repayment term, or both. This can help you lower your monthly payments and free up some cash. However, you’ll need to have a good credit score, a positive equity in your car, and a stable income to qualify for refinancing. You’ll also have to pay fees, such as origination fees, title fees, or appraisal fees, to get a new loan.
Selling your car
Selling your car means getting rid of your car and using the proceeds to pay off your existing loan and any other debts. This can help you eliminate your debt and avoid paying interest and fees. However, you’ll also lose your transportation and have to find another way to get around. You’ll also have to deal with the hassle of finding a buyer, negotiating a price, and transferring the title and registration.
Taking out a personal loan
Taking out a personal loan means borrowing money from a bank, credit union, online lender, or other source without using your car as collateral. This can help you avoid the risk of losing your car and the cost of fees and interest. However, you’ll need to have a good credit score, a high income, and a low debt-to-income ratio to qualify for a personal loan. You’ll also have to pay a higher interest rate than a secured loan, since the lender is taking more risk.
Conclusion
Auto equity loans are a type of secured personal loan that uses the equity you have in your car as collateral. They can be a convenient and fast way to get cash when you need it, but they also come with risks and costs. You should weigh the pros and cons of auto equity loans and compare different offers from different lenders before taking one out.
You should also consider other alternatives, such as refinancing your car loan, selling your car, or taking out a personal loan, that may be better for your situation. Remember, borrowing money against your car is a serious decision that can affect your finances and your future. Make sure you do your research and make an informed choice.
