Do you need some extra money? If you’ve got a car, you might be able to get some.
As of 2015, over 90% of American households had at least one car.
Using the equity in your vehicle is a great way to get some extra cash when you need it.
Here’s a quick rundown on everything you need to know about auto equity loans.
What Is an Auto Equity Loan?
When you have something of value with no debt against it, you’ve got equity. A vehicle equity loan is a loan based on the value of your vehicle.
Auto loans can be up to 95% of the equity value and have terms of up to seven years. There are many factors that go into determining the value and term of your loan. We’ll discuss that in further detail in a minute.
A quick note, your vehicle can still have equity even if you do have a loan against it. The equity in your vehicle depends on how much of that original loan you have paid off.
For example, let’s say you have a 2012 Chevrolet Malibu worth $10,000. If you have no vehicle loan, then you have $10,000 worth of equity. If you still owe $5,000 on your vehicle loan, then you have $5,000 worth of equity.
Auto equity loans are an easy alternative to other types of loans. Home equity loans, for example, require more time and paperwork to complete.
If you need money fast, this type of loan is the way to go.
Auto Loan vs Other Loans
The primary difference between an auto equity loan and other loans is the collateral. Let’s take a look at a few other types of loans and see how an auto loan compares.
A home equity loan uses your home as collateral. If you don’t own a home, this isn’t an option for you. Also, you can’t get money fast with a home equity loan.
Home equity loans require mortgage checks and recording fees. They also need a more thorough credit check. Plus, they may require an appraisal to value the home.
An unsecured personal loan is based on your personal credit alone and requires no collateral. If you’ve got bad credit, this isn’t an option for you. Also, these loans tend to be smaller. If you’re looking for more than a few hundred dollars, this isn’t the loan for you.
Credit cards are a type of unsecured loan. Again, if you’ve got bad credit, you won’t get approved. And credit cards also have high rates and fees, so be careful what you sign up for. An auto loan will usually have a reasonable rate and no surprise fees.
How’s Your Credit Score?
Have you checked your credit lately? If not, you should. The three major credit agencies, Transunion, Equifax, and Experian, all offer free reports once a year.
Your FICO score is a summary of your credit report that helps lenders quantify risk.
How do you get a good FICO score? Your score depends on your credit history.
If you have had credit in the past and paid it as agreed, then your score will be high. If you have limited past credit, or have had a few slow payments, then your score might be lower.
If your FICO score is over 600, then you’ll have no problem getting a car equity loan.
What if your score is lower than 600? That’s okay too.
Most auto equity lenders still lend to those with lower credit scores. You might pay a higher interest rate, but it’s still an option.
Factors That Impact Interest Rates
The interest rate on your auto equity loan depends on several factors:
Your Credit Score
The lower your score, the more risk to the lender. That means you’ll have a higher interest rate.
The Age and Condition of the Vehicle
Loans on newer vehicles have lower interest rates. Mileage counts as well. If you’ve taken good care of your vehicle, you shouldn’t have any problems.
The Term of the Loan
Shorter loans have lower interest rates than long-term loans.
The Government
Yes, the government sets interest rates. Auto loan rates are based on the WSJ Prime interest rate at the time of the loan.
Auto Equity Loan Process
The process is where an auto equity loan has other loans beat. It’s much easier to get auto equity loans than other types of loans.
You’ll start by speaking with a lender about what you need. The lender then has you fill out an application.
With the information on the application, the lender pulls your credit report and values your vehicle. This determines the terms of your loan.
After you’re approved, the lender gets paperwork together. They’ll need a copy of the vehicle title to do the paperwork.
Once you sign the paperwork, you can usually leave with a check that day.
The Right Loan for You?
Let’s review the details of auto equity loans:
- They are fast and easy to get. If you need money right away, this is the way to go. Other equity loans take longer and need more paperwork.
- You don’t need stellar credit to get one. If you’ve had a few credit bumps in the past, that’s okay.
- Auto loans help improve your personal credit. If you have had past credit issues, an auto loan is a great way to restore credit. As you make your monthly payments on time, your credit score improves.
- Interest rates and fees are better with an auto loan than a credit card or other unsecured loan.
Here’s a quick note about fees: There will be documentation and recording fees with your auto loan. But fees are usually financed into the loan. And you won’t be charged any fees later in the loan as long as you pay on time.
The Fast Loan Alternative
If you need money fast, consider auto equity loans. Don’t get behind on bills. Let the value of your car work for you.
If you’ve had experience with an auto equity loan, feel free to leave a comment. Also, check out our DIY Auto Repair blog for tips on how to keep your car in tip-top shape.