Similar to home equity loans, auto equity is credit facilities advanced to people who deposit vehicles as collateral. Like any other loan, an auto equity loan attracts interest. As a secured loan, an auto equity loan carries risks. For instance, failing to repay the loan can lead to repossession of your car by the bank. Even more, missing repayments can lead to a bad credit score. That’s why you should only consider auto equity loans for emergencies. To help you get it right with auto equity loans, this article contains the basics—including where to get your loan and how to choose the best credit facility.

The Basics

When it comes to auto equity loans, you’re required to use your vehicle to get a loan and then pay it back with interest.

Like other types of loans, auto equity loans do carry a risk. If you aren’t able to repay your loan, the lender can repossess your vehicle. And the hardship of car repossession can be extremely devastating. Even worse, the lender can hurt your credit rating by reporting to the credit bureaus that you missed your payments. With these financial risks, you only need to apply for auto equity loans during emergency situations.

Why Apply For An Auto Equity Loan?

Auto equity loans provide a quick source of money for those who’ve emergency situations. As compared to traditional loans, auto equity loans are easier to qualify for since your car serves as collateral. Plus, they come with longer terms as well as lower interest rates and the lender doesn’t consider your credit rating.

All you need to do is to fill an application form and provide details regarding your vehicle’s value plus the amount of equity you’ve in it. Once your loan is approved, the money might be deposited into your account within 24 hours, depending on your lender.

To qualify for an auto equity loan, you need to have a free and genuine title. What this means is that there should be no liens or any other encumbrances on the title.

What to Consider

Before taking out an auto equity loan, take time to carefully compare the rates offered by different lenders. Remember, auto equity loans can sometimes get expensive, so be careful with the choices you make.

On top of interest costs, auto equity loans also come with DMV lien fees as well as documentary stamp tax fees. Most often, these additional charges are included as part of your loan, meaning that you’ll pay interest on them over a given period of time. So, make sure that your APR (annual percentage rate) reflects all fees.

With auto equity loans, you risk repossession. Failure to repay your loan on time could land you in trouble. The lender might be forced to repossess your vehicle. And if it’s your only source of transportation, things could even become worse on your side. If the lender reports this to the credit bureaus, your credit rating could be negatively affected.

Where To Find Auto Equity Loans

Most community banks offer auto equity loans. Plus, you can also find them in some credit unions. The rates will depend on your credit rating, credit history, as well as the value of your car.

Aside from community banks and credit unions, you could also obtain an auto equity loan from online lenders. Such lenders typically offer secured loans with an APR of 36 percent (maximum) and 2 to 5-year repayment terms. According to regulators, 36 percent is the maximum limit of an affordable loan.

Alternatives Options For Borrowing Against Your Car

When in a financial emergency, you might find it hard to obtain a loan with affordable terms. But that shouldn’t stop you from seeking financial help. You can consider the following options:

  • Auto loan refinancing: If you aren’t able to cope up with loan payments, refinancing an auto loan could be an excellent choice for you. Certain lenders also provide cash-out auto refinance loans that allow you to apply for a new car loan for a greater amount than your outstanding loan balance. The new loan replaces your original loan and you keep the remaining cash.
  • Auto title loans: Auto title lenders often provide quick loans in exchange for retaining your car’s title as collateral. The good news is that they don’t check your credit record. So, even if you have a bad credit rating, you can still qualify for an auto title loan.
  • However, it’s important to note that title loans charge very high-interest rates- about 300 percent.
  • Unsecured loans: These types of loans aren’t usually secured by collateral. That’s why they charge more interest than secured loans. But the good news is that you won’t risk losing your property in case you aren’t able to make payments.
  • Payday loans: Payday loans are commonly offered through federal credit unions. They come with consumer protections such as a cap on fees, shorter-term lengths (1 to 6 months), as well as a ceiling on interest rates.
  • Bill extensions: If you’ve any pending bills, try talking to the company. Explain your situation to them and see if they can give you an extension. If they’re convinced that you’re acting in good faith, they might actually extend the deadlines for a short period of time.

Key Takeaway

Auto equity loans allow you to borrow against your car’s value. But like other secured loans, you risk losing possession of your vehicle and your credit score taking a hit if you can’t make timely payments. That’s why it’s always advisable to take out these loans only when in a financial emergency and after exhausting all other options.

The Bottom-Line

Don’t let a financial emergency interfere with the quality of your life. If you don’t have any option, you can turn to auto equity loans and solve all your financial issues. However, you should get things right when taking this credit facility. The above information will guide you through the journey of taking an auto equity loan. Good luck!