When you’ve been driving your vehicle for some time, it’s an income source even if it’s not your intention to dispose of it. Consider auto equity loans, which allow you to convert the equity in your vehicle into an accessible loan that you can use towards any purpose.
Although the risk and interest rates might not be suitable for everyone, a well-planned method for this type of loan will quickly provide you with the money you require. This article will help you determine whether a car equity loan is the right choice for you.
What is an Auto Equity Loan?
An auto equity loan is a type of secured loan that enables you to borrow against the value of your car as collateral, regardless of its ownership status or equity levels. Auto equity loans usually feature longer loan terms with reduced rates; loan amounts will depend upon factors like equity levels in the car’s fair market value and your income and credit.
Understanding How Auto Equity Loans Work
A vehicle equity loan is determined based on how much a car is worth to its borrower relative to what they owe on it. As an example, suppose your car is valued at $15,000. You’re about to pay the car loan off, and you only owe $1000 on it. That’s the equivalent of $14,000 equity that you can leverage by taking out the auto equity loan.
Your equity in your vehicle can serve as the basis for a loan, and terms vary by lender. For instance, certain lenders can lend up to a limit 100 percent of the car equity, whereas others will loan 125 percent.
As with any loan, such as car equity loans are accompanied by terms and conditions that stipulate interest rate, repayment schedule, and any associated loan fees.
The most distinctive feature of auto equity loans is that the vehicle acts as collateral. It is advantageous because you can get better conditions and rates than an unsecured loan. The disadvantage is that defaulting to repay the loan can give lenders the power to seize the car to recoup the loss.
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Auto Equity Loan vs. Auto Title Loan
Auto title loans and car equity loans sound similar; however, they differ in a major way, which has a significant impact on customers. Auto equity loans let you convert the equity you’ve built up in your vehicle into a loan that you’ll be able to repay in the next few months or even years. If you default on the loan, it can lead to repossession; however, the loan’s terms are generally sufficient for the borrower to stay clear of this.
Auto title loans also utilize equity from your car as collateral; however, their interest rates and terms tend to be more stringent. The majority of auto title loans allow the borrower a month in which to pay back the loan, with higher interest rates than auto equity loans.
The main benefit is that these loans come with low credit requirements, which makes loans more accessible to potential borrowers. However, terms for loans can often be too stringent; many borrowers do not repay in 30 days as required and end up going into default and even losing their car as a result of this policy.
How to Get an Auto Equity Loan
The process of getting Auto Equity Loans involves the assessment of your equity, finding the right lender, and then submitting. This is the complete guide to applying:
Check Your Equity Level
Get a precise estimation of your car’s current market value. A web-based tool like Kelley Blue or Edmunds can be helpful. Once you understand your vehicle’s worth, any outstanding debt can be deducted. This is the result of your equity. Remember that lenders use the value of your equity to calculate the highest amount of loan you are eligible to receive.
Shop for a Lender
Find credible lenders who provide auto equity loan. These loans are offered by credit unions, auto financing companies, and various online lenders. Read reviews of customers and details about the loan, such as interest rates and loan charges. Additionally, lenders must meet different eligibility criteria like the equity amount and credit score requirements.
Apply for the Loan
When you’ve decided on your lender, you must prepare the necessary documents for the application, which include documents proving your income, ID, and a vehicle’s title and evidence of insurance. After that, you have several application methods at your disposal – online through a lender’s website, visiting physical locations, or contacting the lender by phone.
Before signing, ensure you read all loan conditions carefully to be aware of interest rates, repayment schedules and any fees related to it.
Pros of an Auto Equity Loan
Like all financial decisions, getting an auto equity loan comes with advantages and drawbacks. Here are some possible pros of car equity loans:
- Competitive interest rates: Because you secure the loan using your vehicle, which is why you’re likely to get less interest than with an unsecured loan or credit card.
- Less-stringent approval: By offering their car as collateral against loans, even individuals with lower credit scores or imperfect records have greater odds of approval.
- Quick funding: Auto equity loans typically offer a quicker funding process than conventional loans. In certain cases, borrowers may receive the funds in a matter of days after approval.
- Customizable term: Some auto equity lenders can offer flexibility with repayment terms, allowing borrowers to alter the loan terms to fit their personal circumstances. For instance, you could reduce the length of the loan to lessen the amount of time the loan is in effect, which will reduce total interest costs.
Cons of an Auto Equity Loan
- Risk of losing your car’s auto equity: Auto equity loans are secured loans using your vehicle as collateral. If you fail to meet repayment terms on time, lenders could repossess and sell off the vehicle as compensation for unpaid loan balances.
- Full-coverage insurance conditions: Many auto equity lenders require that borrowers maintain an insurance policy with full coverage on their vehicle for the duration of the loan. This type of insurance is more expensive than basic liability coverage.
- Uncommon among lenders: Auto equity loans may be readily available, but they aren’t as popular or widely available in the same way as other types of loans. This limitation can restrict the options for customers. Additionally, the auto lender you currently have may not provide this loan, which means you’ll have auto loans with several lenders.
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Auto Equity Loan Alternatives
A car equity loan is just one of the ways to receive the financial aid you require. Other loan options are also readily available. Here are some options to consider.
Personal Loans
Personal loans are a great option to fulfill various needs, such as financing a vehicle or regular expenses. Unlike auto equity loans, personal loans are unsecured and don’t require you to use your car or any other asset as collateral.
Personal loan interest rates will depend upon your creditworthiness; without collateral backing them up, these could potentially have higher rates. Those with better ratings typically qualify for reduced rates with fixed monthly installments over an agreed-upon term period.
New Credit Card
Credit card companies often give credit cards with low or no APR to attract new customers. Consider applying for a new credit card with a low or promotional interest rate. For instance, if you receive a new card that has zero percent APR over a single year, you’ll only have to pay the minimum amount on the balance every month for the initial 12 months.
This feature lets you build up debt without having to pay it back in full. Remember that once the promo period expires the balance will begin accruing at the normal APR of the card.
Home Equity Loan
Home equity loans works similar to a car equity loan however it utilizes the equity of the home instead of your car. It’s a secured loan since your home acts as collateral. The loan becomes an additional mortgage.
Home equity loans typically feature fixed interest rates and monthly repayment terms over an agreed-upon term period. The loan amount may be greater because homeowners have many thousands in equity that they can draw down.
Additionally, Home equity loans typically feature lower interest rates than secured loans. But, you could be evicted from your house if you do not pay back the loan.
Auto Loan Refinance
Refinancing an auto loan means replacing it with one with more favorable terms – typically a lower interest rate or a longer payment term. This usually reduces the amount you pay each month, which makes the loan more affordable.
The Takeaway
Car equity loans use a car’s equity to access cash, with a short waiting time. While they can provide benefits, like potential lower interest rates and speedy access to funds, they do risk significant dangers, like possible loss of the vehicle. Insurance requirements for full coverage and the relatively low number of these loans with lenders are a few of their weaknesses.
Anyone considering auto equity loans must carefully assess their finances, options such as credit cards, personal loans, and home equity loans, and refinancing of auto loans, before conducting research into reliable lenders to make an informed decision that meets both their financial requirements and objectives. Conducting thorough due diligence research before selecting one to finance auto equity loans.
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