What Is An Auto Equity Loan? – Forbes Advisor - Forbes

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Updated: Mar 19, 2021, 2:26pm
While auto equity loans aren’t very common, they allow you to borrow against the equity you have in your car. Your equity is the difference between your auto loan’s balance and how much your car is currently worth. If you have equity in your car and need to borrow money, this could be an option worth pursuing.
We’ll walk you through how auto equity loans work to help you decide if this type of personal loan is right for you.
When you take out an auto equity loan, your lender will offer you a loan based on the equity you have in your car. If you’ve paid off your car loan and you owe it free and clear, your equity would be equal to the car’s current market value. If you still owe money on your loan, however, your equity would be equal to the car’s current value minus your loan balance.
For example, if the car is worth $20,000 and you owe $5,000 on it, you have $15,000 worth of equity ($20,000 – $5,000).
However, each lender sets its own rules for the maximum amount you can borrow. Some will let you borrow your full equity (such as the $15,000 in the previous example) while some offer loans up to 125% of your equity, which would work out to $18,750 in this case ($15,000 x 125%)
An auto equity loan can be a good option if:
Getting an auto equity loan is a bit different than applying for a personal loan. While lenders may set their own rules for the application process, here are rough guidelines you can follow:
Both auto equity loans and auto title loans are loans based on the amount of equity you have in your car. Lenders are also likely to require you to offer up your title as collateral until you repay either type of loan.
However, auto title loans tend to be riskier. They charge very high rates, even on par with payday loans. These high fees can make it difficult to meet your repayment obligations and cause the lender to seize your car. For example, according to the Consumer Financial Protection Bureau, about 20% of auto title loan borrowers have their cars repossessed.
Auto title loans also tend to be short-term loans, typically a month or less. Auto equity loans, on the other hand, can be for several months or years just like with a traditional auto loan.
If you’re deciding between the two, we recommend you stick with auto equity loans.
The good news is that aside from auto equity loans, you have a lot of options for borrowing money if you’re in a pinch, including:
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Lindsay VanSomeren is a personal finance writer based out of Kirkland, Washington. Her work has appeared on Business Insider, Credit Karma, LendingTree, and more.
Jordan Tarver is the assistant editor for loans at Forbes Advisor. Before joining Forbes Advisor, Jordan was an editor and writer for multiple finance sites, focusing on loans, credit cards and bank accounts. His goal is to create actionable content that enables people to make sound personal financial decisions. When he is not working on personal finance content, Jordan is a self-help author and world traveler who helps people experience the world and discover themselves.

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