What is an auto equity loan, and who is it best for?
Published 6:39 AM EDT, Thu May 9, 2024
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If your car is worth more than your auto loan balance, you might be eligible for an auto equity loan. This type of secured personal loan lets you cash out your vehicle’s equity (the difference between the market value of your car and what you owe on it) and use the money for whatever you want, including for emergencies or to pay off credit card debt.
As with any form of borrowing, an auto equity loan isn’t the ideal way to get cash because it involves taking on new debt. Plus, you must use your car as collateral for the loan, which means you face repossession if you miss payments. But auto equity loans are less risky than some alternatives, including car title loans. They’re best for borrowers who can’t access lower rates on unsecured personal loans.
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Auto equity loan basics
Auto equity loans allow you to borrow up to a set percentage of the equity in your car, sometimes as high as 125%. So, if you have a fully paid-off vehicle worth $20,000, for example, you can potentially take out an auto equity loan up to $25,000 ($20,000 x 1.25 = $25,000).
Of course, you may not want to borrow the full amount available, since doing so can put you underwater (or upside down) on your loan — meaning you’ll owe more than your wheels are worth.
There are also strict requirements to qualify for an auto equity loan, and the more equity you want to cash out, the stricter the requirements get. Most notably, you must offer your car as collateral, which means it can be seized if you fall behind on payments. Additionally, the lender will review details about the car to determine whether you qualify and to set your interest rates. (As of early May 2024, the lowest rates on an auto equity loan were around 7%.)
“Keep in mind factors such as a vehicle’s make, model, year, mileage, condition, location and current market demand will influence a vehicle’s value,” said David Paris, a product director at J.D. Power.
Auto equity loans are primarily offered by credit unions, which means you’ll need to be a credit union member to apply in most cases. However, some banks and online lenders also offer these loans.
| What’s the difference between an auto equity loan and an auto title loan? |
|---|
While auto equity loans are typically repaid over seven years or fewer, title loans are far riskier and exorbitantly expensive — they’re usually paid back within 30 or fewer days, with APRs as high as 300%. Both of these loan types use your car as collateral.
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How auto equity loans work
With auto equity loans, the lender determines how much you can borrow by considering the details of your vehicle and your current loan (if you have one). You must have sufficient equity to be approved, and you may not qualify if your car is over 10 years old or has over 250,000 miles.
If you qualify, the lender holds your car’s title until you repay the full balance (plus interest and fees) via monthly installments.
Here are characteristics that typically equate to auto equity loans with the best available rates:
- Newer vehicle with low mileage
- No salvage status, flood/hail damage or liens against your car
- Credit scores of 700 or higher
- Borrow no more than 80% of the vehicle’s value
- Short repayment term on the loan
What are the benefits of auto equity loans?
- Comparatively low rates: The average auto equity loan interest rates are far lower than credit card APRs and can be lower than personal loan rates.
- Higher loan amounts: Your collateral can qualify you for a higher loan amount than if you applied for an unsecured loan.
- Quick cash: Once you’re approved and sign an auto equity loan, it can deliver a lump sum of cash upfront without waiting periods.
Related >> More benefits of personal loans
And what about the drawbacks of these loans?
Taking on an auto equity loan can also be risky, and market conditions can impact your options, too.
“With interest rates at historic highs and vehicle values declining, now might not be the best time to take advantage of this option,” said Tom Holgate, a veteran auto lending executive. “If you have any plans of trading in your vehicle in the near future, it is likely best to hold off.”
These are the reasons to avoid this type of financing:
- Potential repossession: If you fall behind on payments, the lender can seize your vehicle to recoup the debt.
- Inflated interest rates: APRs are currently high for all types of loans, including auto equity loans, making it an expensive time to borrow.
- Difficulty qualifying: In addition to credit requirements, the lender may require a clean title and full-coverage auto insurance. Also, you won’t qualify for the lowest rates if you have an older or well-worn vehicle — lenders might require a visual inspection.
- Limited access to equity: The lender may base your equity calculation on the car’s wholesale value and quote higher APRs if you’re seeking the full borrowing amount available.
- Risk of an underwater loan: Vehicles lose value over time, so you could end up owing more than your car is worth.
- Lender fees: The lender may impose various surcharges, including origination and title processing fees, eating into your loan amount.
Who is an auto equity loan best for?
Auto equity loans are best for borrowers with ample equity who need to pay off high-interest debt; can realistically afford the loan payments; and have exhausted better alternatives (see below), such as lower-rate unsecured loans.
With the average credit card APR currently above 20%, taking out an auto equity loan to consolidate credit card debt could save you significant interest. Still, a secured loan is not the best way to get cash, even if it’s for an emergency, since it puts your property at risk of seizure.
Tip: Review the lender’s car insurance requirements before you apply for an auto equity loan. If you have to increase your insurance coverage to qualify, the loan may not be affordable.
Are there any good alternatives to an auto equity loan?
On the spectrum of financing options, auto equity loans fall in the middle of the pack in terms of cost and risk.
| Alternative | How it works | Fine print | Good for… |
|---|---|---|---|
Cash-out auto refinance
| Replace your current auto loan with a new one and pocket the cash from your car’s equity.
| If you extend your repayment, you might end up paying more in interest charges on the new loan.
| Borrowers with good credit who want to change their auto loan terms.
|
Auto title loan
| Use your car title as collateral for a loan that’s paid back in 15 or 30 days.
| APR can be as high as 300%.
| No one. If you need emergency cash, consider other types of loans, such as a payday alternative or credit-builder loan.
|
Unsecured personal loan
| Receive cash upfront based on your credit history or your cosigner’s.
| Average APR is over 12%.
| Borrowers with good credit (or a cosigner) aiming to pay off high-interest debt without using collateral.
|
Tap home equity
| Homeowners can borrow a portion of their equity as a lump sum (home equity loan) or draw on funds as needed (home equity line of credit).
| Risk of home foreclosure if you fall behind on payments.
| Borrowers with sufficient home equity who want to zero high-interest debt balances and can realistically afford new loan payments.
|
0% introductory APR credit card
| Take advantage of a 0% interest period (usually 12 to 21 months) on balance transfers made with the card.
| APR is often ultra-high after the introductory period ends, and most cards have a 3% to 5% balance transfer fee.
| Borrowers with excellent credit who can pay off the full card balance before the introductory period ends.
|
Where to find auto equity loans
Credit unions are more likely than banks to offer auto equity loans by name, but you typically need to be a credit union member before you can apply. For example, OAS Federal Credit Union offers auto equity loans (and, like other federal credit unions, is required by the National Credit Union Administration to cap personal loan rates at 18%), but you must be part of a “Select Employee Group” to qualify for membership.
Broadening your search to secured personal loans will reveal more lender options. An online lender like Best Egg, for example, offers loans for as high as 250% of your vehicle’s wholesale value — but they might not be your first choice since they also charge an origination fee up to 8.99% and the APR ranges up to 29.99%.
Here are CNN Underscored Money’s best secured personal loans:
Our picks at a glance
| Rating | Collateral accepted | APR range* | Loan amounts | |
|---|---|---|---|---|
First Tech Federal Credit Union
| 5 | Savings, CD, Stock
| 3.05% to 18.00%
| $500 to $1 million
|
Navy Federal Credit Union
| 4.6 | Savings, CD
| 2.25% to 18.00%
| $250 to collateral value
|
Upgrade
| 4.6 | Vehicles
| 8.49% to 35.99%
| $1,000 to $50,000
|
Digital Federal Credit Union
| 4.5 | Savings, CD
| 3.50% to 18.00%
| $200 to $100,000
|
Regions Bank
| 3.9 | Savings, CD, money market
| Starts at 4.00%
| $250 to 100% of the account value
|
Best Egg
| 3.9 | Home fixtures, vehicles
| 5.99% to 29.99%
| $2,000 to $100,000
|
7 steps to get an auto equity loan
- Check your equity — and credit: Use the National Automobile Dealers Association guide and other free, online valuation tools to estimate your car’s value accurately, then subtract your auto loan balance to calculate your equity.
“Be prepared to negotiate with lenders if their appraisal differs from your estimated value,” said Paris. To support your case, “provide any relevant documentation or evidence to support the valuation,” such as records of your vehicle service history, he added. - Review your credit strength: Though secured loans typically have more lax credit requirements than unsecured loans, lenders still have minimum score requirements. Check your credit scores to get an idea of whether you’ll get approved.
While eligibility criteria vary by lender, having good-to-great scores (670 and above, as defined by FICO) should help you qualify if not access competitive APRs. Fair scores (580 to 669) might open the door but lead to expensive rates, which you can minimize by borrowing from a federal credit union that caps APRs at 18%. - Determine your needs: Pinpoint the amount you need to borrow and review your budget to determine what monthly payment you can afford. Using a free, online personal loan calculator (like Calculator.net’s) can help.
- Shop around: Vet lenders by reviewing their requirements and reading customer reviews. Prioritize lenders that offer online pre-qualification, which previews the rates you might qualify for without triggering a hard credit check (that can temporarily drop your credit scores by five points, according to FICO).
- Apply: Be prepared to submit details about your vehicle, including mileage and estimated value, along with information about your current loan, proof of income and your driver’s license.
- Choose a loan offer: Review your offers to see if any meet your needs before making your choice and signing the loan documents.
- Receive the funds — and enter repayment: The lender will usually deposit the funds directly to the bank account of your choice. You might consider enrolling in automatic payments as you begin repaying the debt; that’ll help ensure you don’t fall behind.
Related >> How to get a personal loan — and what to do if you’re denied
Frequently asked questions (FAQs)
Your borrowing power is based on how much equity you have in your vehicle. Calculate your car’s equity by subtracting your auto loan balance from the estimated value of your car.
Depending on the lender, funding could take several business days or weeks.
Yes, many auto equity lenders accept applications online.
If you default on an auto equity loan, you’ll face several penalties. You’re likely to be charged late fees, see significant damage to your credit scores and have your vehicle repossessed.
Each lender has different credit requirements to qualify for their auto equity loans, but the higher your credit scores, the more likely you are to receive multiple loan offers and be approved for competitive interest rates.
Editorial Disclaimer: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airlines, hotel chain, or other commercial entity and have not been reviewed, approved or otherwise endorsed by any of such entities.
This content is for educational purposes only and is not intended and should not be understood to constitute financial, investment, insurance or legal advice. All individuals are encouraged to seek advice from a qualified financial professional before making any financial, insurance or investment decisions.
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