Auto Equity Loans

What Is an Auto Equity Loan?

An auto equity loan, also known as vehicle equity loan or car equity loan, is a loan that allows you to use the equity in your car to borrow money. When you get an auto equity loan, your car is used as collateral for the loan, and you are expected to pay back the loan with interest and any applicable fees over time.

Auto equity loans can be an appealing choice for borrowers who have less-than-perfect credit or are looking for a fast turnaround time to complete the loan process.

Lenders that provide auto equity loans may have specific requirements for the vehicle that’s used as collateral for the loan. For example, they may have a maximum allowable mileage or impose a minimum vehicle value that’s required in order to qualify. When you are applying to borrow against the equity of your automobile, the lenders may also apply a maximum Loan-to-Value ratio (LTV) to your loan application. Applying the maximum LTV to the value of your vehicle is one of the ways auto equity lenders determine your maximum loan amount.¹

Benefits and Drawbacks of Car Equity Loans

As is the case for any loan product, there are certain advantages to choosing an auto equity loan, but there are also potential drawbacks that you should be aware of.

Car equity loan benefits

• Higher approval rate: Due to their secured nature, auto equity loans may offer higher approval rates for some loan applicants, since the use of the vehicle as collateral can lower the lending risk for the auto equity loan provider.
• Fast turnaround time: Many car equity loans are designed to offer a speedy application and funding process since some vehicle equity loan applicants are applying for this product while having an urgent need for cash.
• Rates may be lower compared to unsecured loans: Compared to some unsecured loan options – especially compared to payday loans or bad-credit personal loans – auto equity loans may come with lower interest rates. Similar to the potentially higher approval rates, this can be due to the fact that using the car as collateral is required for loan approval.
• Potentially higher loan amounts: If the vehicle on the loan application hold a substantial amount of equity, the car equity loan application may be approved for a comparatively large amount. The higher the value of the car, the higher the approved loan amount may be. With auto equity loans serviced by LoanMart, loan amounts as high as $15,000 are possible in many states!

Car equity loan drawbacks

• Limited number of lenders: It may be more difficult to find an auto equity lender than it is to find a provider of different types of loans such as personal loans. The requirement to use a vehicle for the loan comes with a requirement for auto equity lenders to be proficient in evaluating vehicles and processing title paperwork. This specialized underwriting and processing capability is not intuitive for all lending companies.
• Risking your vehicle: Borrowing against a vehicle’s equity comes with the risk of losing access to the vehicle. If a borrower misses to make required payments by the due date, the auto equity lender may assign the vehicle for repossession. Having the vehicle repossessed by the lender can be a serious downside to car equity borrowers, especially if the vehicle used for the loan is the primary mode of transportation. Furthermore, if the lender or loan servicer reports to the credit bureaus, the repossession may be reported on the credit bureau trade line and deteriorate the borrower’s credit score.
• Depreciating collateral: In general, vehicles are depreciating assets, which means that they lose value over time. Depending on the specifics of your vehicle and market conditions, the car or truck that was used to secure the loan can lose value faster than the loan is paid back. In that event, the borrower may end up in a situation where the outstanding loan amount exceeds the value of the vehicle. This scenario, which is sometimes referred as being “under water” can be a disadvantage, since it can make it difficult or impossible to refinance the auto equity loan.

How to Get an Auto Equity Loan?

Getting an auto equity loan is a fairly straightforward process. No matter which lender you choose to work with, the process can typically be grouped into the following three steps:

• Apply: To apply for an auto equity loan, you can usually visit the lender’s website or sometimes submit your application by calling a loan officer.
• Receive final approval: Once your application is complete and submitted, the lender decides whether or not to approve your loan application. If your application is receives preliminary approval, you’ll be asked to provide the necessary documents for underwriting an auto equity loan.
• Sign loan agreement, submit title and get funded: Once your underwriting documents have been reviewed and verified, the lender will make your loan contract available – often times this is done electronically. Borrowers are advised to carefully review their vehicle-secured loan agreement before signing. Upon signing, the borrower needs to send the vehicle title to the lender in order to receive the loan disbursement.

What Are The Requirements for Obtaining an Auto Equity Loan?

In order to qualify for a car equity loan, borrowers must meet all of the lender’s underwriting requirements.¹ These requirements can be grouped as follows:

• Vehicle requirements: The most important requirement for getting an auto equity loan is, of course, owning a car or truck that meets the lender’s requirements, including the requirement to have enough equity. As mentioned above, the specific vehicle requirements vary from one lender to the next.
• Document requirements: The required underwriting documents usually include pictures of the vehicle and vehicle title, some proof of income and current address, and a copy of a government ID such as a state ID, driver’s license or passport.
• Additional requirements: In addition to the above documents, some lenders may require a few references and also have certain expectations about the car insurance that the borrower must have at the time of the loan and during the loan.

Considerations Before Applying

If you are considering to submit an application for an auto equity loan, here are a few items that may be worthwhile to consider before doing so:

• Check the equity of your vehicle: Checking the equity of your vehicle can give you an idea if applying for a loan against your vehicle is likely to be successful. If your vehicle is worth very little, or if you are under water on an outstanding loan against your car, an auto equity loan may be more difficult to get.
• Consider alternatives: Before taking out a loan, it’s a good idea to consider alternatives to borrowing money from a loan provider. Alternatives could potentially include to ask friends and family for help, finding ways to reduce your expenses, asking for a payment deferral for any past-due bills you might have or temporarily boosting your income with overtime or a second job.
• Comparison shop: If you end up deciding to apply for an auto equity loan, it can be a good idea to research different loan providers and apply with several. This can allow you to identify the best loan offer for your needs, and potentially save you money if you find the loan offer with the lowest Annual Percentage Rate (APR).
• Make a financial plan: If you end up taking out an equity loan against your car, a financial plan can be a good idea to make sure that you can stay on top of your loan payments. With your vehicle potentially being on the line if you default on your loan, having a solid budget that includes the loan payment can be a good tool to ensure a smooth borrowing experience.

Are Auto Equity Loans a Good Idea?

Whether a car equity loan is a good idea or a bad idea depends on your individual financial situation. It’s important to be aware of the potential benefits and disadvantages of an auto equity loan before rushing to apply for one. After a careful evaluation of the pros and cons of getting a vehicle equity loan, consideration of available alternatives and potentially comparison shopping for a loan, it’s up to you to decide if an auto equity loan is a smart idea for you.