If you’re in an emergency situation and need quick access to cash, your options are limited. That’s especially the case if you have terrible credit. Payday loans are unsecured, but charge upwards of 400% in interest and auto title loans require that you own your car free and clear.
If you don’t want to pay outrageous interest rates and are still making payments on your car, you don’t have to go far to get the cash you need. Some of the same lenders that offer payday and car title loans also offer auto equity loans.
How do auto equity loans work?
An auto equity loan is similar to a home equity loan. But instead of using the equity in your home, you use the equity in your car. The lender calculates your car’s equity by taking the difference between how much you owe on your auto loan and the car’s fair market value.
For instance, if you owe $2,000 and the lender appraises your car at $6,000, you have $4,000 in equity. An auto equity loan allows you to borrow against that equity. You won’t necessarily get to borrow the full $4,000 in this scenario, though.
Lenders typically limit how much of your equity you can use for the loan, and they also have general limits for all loans.
Here is a list of the benefits and the drawbacks to consider when shopping for auto equity loans.
- Anyone can qualify.
- Quick cash.
- You don’t have to sell your car.
- You could lose your car.
- High interest rates and fees.
- You may need to buy more insurance.
Pros of auto equity loans
If you’re considering getting an auto equity loan, here are three benefits you’ll get from going through with it.
1) Anyone can qualify
Since you’re using your car as collateral and the loan is much less than the car’s value, lenders typically don’t need to do a credit check — their investment is safe. So, it doesn’t matter what you’ve done in the past. You can get approved, no problem.
2) Quick cash
With an auto equity loan, you’ll typically get a check as you walk out the lender’s door. The whole process likely won’t take more than a half an hour. So, if it’s urgent that you get some cash now, auto equity loans are worth considering.
3) You don’t have to sell your car
While you’re adding a second lien to your car, you still get to drive it around. With a similar loan called an auto pawn loan, you actually have to leave your car with the lender while you make payments. With an auto equity loan, however, you keep your wheels when you need them.
Cons of auto equity loans
While auto equity loans do have their benefits, there are some major drawbacks you need to know. Here are three.
1) You could lose your car
Although you get to keep your car while you’re making payments, defaulting on the loan could result in repossession. If you rely on your car to get to work or do other essential things, you could be putting yourself in a dangerous spot if you’re not sure you’re going to pay off the debt.
Ben Brady, whose name has been changed for confidentiality, had his car repossessed after his ex-wife drained his bank account. “It was a horrible experience,” says Brady. “I know my experience was kind of a one-off, but I think it’s important for people to truly understand the risk they’re taking.”
2) High interest rates and fees
Most lenders that offer auto equity loans do so as a slight variation of their auto title loans. As a result, there’s not much difference between the two in terms of interest rates and fees. That said, they’re still a better deal than payday loans, and some lenders offer lower interest rates than others, so shopping around is critical.
3) You may need to buy more insurance
Auto equity lenders typically require that you have full coverage on your car. If you’re still making payments on it, the primary lender probably already has this requirement so you may not need to make any changes. But if you have paid off the car and dropped your coverage to liability only, you might need to increase your coverage and your monthly premium to get approved.
Where to find auto equity loans
The big banks like Wells Fargo, Chase, and Bank of America don’t offer auto equity loans. However, credit unions, community banks, and specialized lenders in your area may offer them.
Here are some specialized lenders you may want to consider.
LoanMart doesn’t explicitly offer auto equity loans as a separate loan from its auto title loans. Rather, it simply considers auto title loans on cars that aren’t owned outright. They do, however, require that you have a significant amount of equity in your car to qualify for the loan.
One big reason to consider LoanMart is that it offers long repayment periods on some of its loans. If you can score an installment loan with the lender, it’ll be easier to pay back.
Speedy Cash also considers auto equity loans as a variation of its auto title loan. So, it’s possible that you’ll end up paying the same interest rate that the lender charges on its title loan, which is extremely high (but again, much better than payday loans). Speedy Cash doesn’t offer long repayment terms, so you’ll need to make sure that you can afford to pay off the loan with your next paycheck or two.
If you’ve already paid off your car and just don’t want the high interest rate that comes with an auto title loan, Finova Financial is a solid option. Your credit doesn’t have to be good or even fair to get approved by the lender, and you can expect reasonable interest rates on Finova’s auto equity loans.
Of course, this doesn’t work if you haven’t paid off your car. But if you have, it’s worth it.
Who is eligible for an auto equity loan?
To get an auto equity loan, you generally need the following:
- A car that’s in driving condition
- A valid ID
- Proof of residence
- Proof of insurance (usually including collision and comprehensive insurance)
- Your first lien to prove how much you owe
- Enough equity in the car
If the equity in your car is too low, it might not be enough to meet the lender’s minimum. But keep in mind that each lender may have a different way of calculating equity, and they all have different loan minimums, too. So shop around to make sure you get the loan that works for you.
Compare the lender’s we’ve listed here, as well as other auto title lenders that may offer auto equity loans, or at least auto title loans that don’t require that you own the car outright.
The more shopping around you do, the easier it will be to make sure you get the best deal available.