What Is an Auto Equity Loan?

Auto Loans, Loans, Personal Loans
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An auto equity loan is similar to a home equity loan, but you use the value of your vehicle instead of your home to get a loan, then pay it back with interest.

Like all secured loans, auto equity loans carry risk: If you don’t make your loan payments, the lender can repossess your car. If you use your car to get to work or school, the hardship of repossession is obvious. In some cases, the lender can also hurt your credit if it reports your missed payments to the credit bureaus.

With these risks to your financial stability in mind, we recommend auto equity loans solely for emergency situations — and even then, there are usually better options for fast cash.

In addition to auto equity loans, other ways to borrow against your car include auto loan refinancing and auto title loans, both of which should also be considered in emergency situations only.

Where to find auto equity loans

Most community banks and some credit unions offer auto equity loans. The rates for such loans depend on your credit score, credit history and the value of your car.

The four largest banks in the country by deposits —  Bank of America, Chase, Citibank and Wells Fargo —  do not offer auto equity loans, but some smaller banks do.

At federal credit unions, the maximum annual percentage rate that can be charged on such loans is 18%, although there may be extra application fees.

You could qualify for an auto equity loan from a lender other than a community bank or credit union. Such lenders, many of which operate online, offer secured loans with a maximum APR of 36% and two- to five-year repayment terms. Regulators and consumer advocates say 36% is the upper limit of an affordable loan.

Two big lenders for auto equity loans are Mariner Finance and OneMain Financial, which offer secured loans below 36% to car owners with poor credit scores, generally below 630.

Another lender, Finova Financial, extends auto equity loans to borrowers with credit scores that are even lower, but it has fees in addition to its stated APR that makes the loan more expensive.

Other ways to borrow against your car

Auto loan refinancing

Refinancing an auto loan makes sense if interest rates drop, or if you’re unable to keep up with loan payments. Some lenders also offer cash-out auto refinance loans, which let you take a new auto loan for a higher amount than what’s left on your original loan. The new loan replaces the original and you keep the extra cash.

Auto title loans

Auto title lenders provide quick cash in exchange for holding the title of your car as collateral, without checking your credit. This means you can get a loan even if you have bad credit, but it also means you may be at a higher risk for defaulting.

Similar to payday loans, car title loans carry very high interest rates — around 300% — and are usually due in a short time period, typically 30 days. A high percentage of auto title loan borrowers end up having to extend their loans, according to a report by the Consumer Financial Protection Bureau, incurring additional fees and raising the risk of repossession.

Remember car insurance

No matter which type of auto equity loan you choose, lenders typically require proof of comprehensive and collision insurance coverage. If your car is paid off, you may have chosen to carry only liability insurance — which is mandatory in most states — and dropped comprehensive and collision insurance.

If that’s the case for you, auto equity lenders may offer you the option to purchase a form of insurance, known as a “debt cancellation addendum” or simply “credit insurance,” that covers your loan payments if your car is damaged, you lose your job or have an injury. Unlike comprehensive and collision insurance, credit insurance does not cover the cost of repairing your car.

Credit insurance can be expensive, and it is not included in the total cost of your loan. It’s usually cheaper to take out comprehensive and collision insurance instead. The Federal Trade Commission’s website lists the questions you should ask any lender before choosing this option.

If you need fast cash and have bad or no credit, consider these alternatives to borrowing against your car:

Amrita Jayakumar is a staff writer at NerdWallet, a personal finance website. Email: ajayakumar@nerdwallet.com. Twitter: @ajbombay.