Understanding Equity Auto Finance and Your Options

Equity auto finance can be a lifesaver for those who need a loan but have a poor credit history or no credit at all. You can borrow up to 125% of your vehicle's value.

To qualify for an equity auto loan, you'll need to have a significant amount of equity in your vehicle, which is typically defined as 10% to 20% of the vehicle's value.

The lender will consider the value of your vehicle, the amount you owe on the loan, and your credit score to determine how much they'll lend you.

With an equity auto loan, you can use the funds for a variety of purposes, such as paying off high-interest debt, covering unexpected expenses, or even funding a down payment on a new home.

Equity auto finance is a type of loan that allows you to borrow money using the equity in your vehicle as collateral. The equity in your vehicle is the difference between its market value and any outstanding loan balance.

To qualify for an equity auto loan, your car must be worth more than the money you still owe on it. For example, if your car is worth $20,000, but you still owe $9,000 on your loan, you can borrow against the remaining $11,000 of equity in your car.

Some lenders will let you borrow up to 100% of the equity in your vehicle, while others might only lend you up to 50% of the amount. However, be aware that borrowing more than your car's equity can put you in a difficult financial position.

Lenders often have requirements for the age or mileage of the car to qualify for an equity auto loan. Once you get the funds, you can use them for anything you want.

Here's a breakdown of the key differences between auto equity loans and auto title loans:

You can fill out multiple pre-approval requests with lenders that offer auto equity loans, and these typically involve soft credit inquiries that won't impact your credit score.

However, it's best to limit how many full loan applications you submit, as these often require hard credit inquiries that can negatively affect your credit score.

To avoid damaging your credit score, it's safer to select your preferred lender in advance and confirm you'll meet their approval criteria.

Applying for an auto equity loan can be a straightforward process, but it's essential to approach it with some caution. You can fill out multiple pre-approval requests with lenders that offer this option without impacting your credit score.

These pre-approval requests typically involve soft credit inquiries, which are a non-issue for your credit score. However, it's crucial to limit the number of full loan applications you submit, as these often require hard credit inquiries that can negatively affect your credit score.

FICO scores have a special provision for certain types of credit inquiries that occur within a 14-day period for rate shopping purposes. However, this provision doesn't apply to personal loans like an auto equity loan, so be mindful of applying for multiple loans in a short time frame.

It's safer to select your preferred lender and confirm you meet their approval criteria in advance. This way, you can avoid applying to multiple lenders and potentially damaging your credit score.

If you're looking for a lender to apply for equity auto finance with, you can consider online lenders like LendingPoint or OppLoans, which offer financing options for people with bad credit.

Some of the lenders that offer equity auto finance have minimum income requirements, such as LendingPoint, which requires a minimum income of $15,000 per year.

Other lenders may have more flexible requirements, like OppLoans, which doesn't have a minimum income requirement.

You can also check with local banks or credit unions in your area, as they may offer equity auto finance options.

Some lenders may have specific requirements for the vehicle you want to use as collateral, such as a minimum age of 5 years or a certain mileage limit, as mentioned in some lender's terms and conditions.

Some car dealers might claim you won't be responsible for the remaining balance on your old car loan when you trade in your old car, but that's not always true.

They'll just roll over the negative equity into your new car loan, so you still end up paying it. This means you'll have to pay interest on the negative equity plus the cost of your new car.

If you have $3,000 in negative equity, as in our example, you'll have to pay that amount to trade in your car. The dealer might promise to pay it off themselves, but they'll really pass the cost on to you.

A dealer rolling the negative equity into your new loan, or taking it from your down payment, is essentially passing the cost to you. This can lead to a bigger loan and more interest to pay.

If a dealer tells you they'll pay off your old car loan, but really rolls the cost into a loan, that's illegal and you should report it to the FTC.

Auto equity loans can offer several benefits, but they also come with some drawbacks. One of the main advantages is that they can have lower interest rates compared to unsecured financing options. This is because the lender has a secured asset, your car, to reduce its risk.

Lower interest rates can save you money in the long run. With secured loans, you might be able to borrow more money than you could with an unsecured loan, as long as you have a large amount of equity available in your car. This can be a big plus if you need a larger loan.

Auto equity loans often have more lenient approval criteria than unsecured loans. Since the lender has a secured asset, it can be easier to qualify for an auto equity loan. This is because the lender has less risk involved.

Here are some key benefits of auto equity loans:

Auto equity loans can get expensive, aside from interest costs, some come with DMV lien fees and documentary stamp tax fees. These fees may be included as part of the loan, meaning you'll pay interest on them over time.

You can borrow a larger amount of money with secured loans, like auto equity loans, if you have a lot of equity available in your car.

Lower interest rates are a significant benefit of secured loans. With less risk for the lender, the interest rates are often lower compared to unsecured financing options.

Having more equity in your car can also lead to more lenient approval criteria. The lender can reduce its risk with the asset you pledge, making it easier to get approved for a loan.

Here are some key benefits of secured loans:

If you're looking for alternatives to equity auto finance, you have several options to consider.

A home equity loan or line of credit (HELOC) can be a better fit for your situation, allowing you to use the equity in your home as collateral to secure financing. You may be able to qualify for a better interest rate and a larger loan amount, depending on your credit score and the amount of equity you have available.

Personal loans can also be a versatile borrowing option, with some lenders offering competitive interest rates even without providing collateral. However, if you have bad credit, you may expect lenders to offer higher interest rates and less attractive borrowing terms.

SoFi, PenFed, Upgrade, U.S. Bank, and Discover are some lenders that offer personal loans with varying APR ranges and loan amounts. For example, SoFi offers APRs ranging from 8.99% to 29.49% and loan amounts from $5,000 to $100,000.

Cash-out auto refinance is another option to consider, where you take a loan for the current value of your car and use part of it to pay off your original car loan. This can be a good option if you need extra cash and the rate on your new loan is lower than what you're paying on your original loan.

However, auto title loans are not recommended due to their high interest rates and short terms, which can make it hard to pay off the loan in time. Only consider this option if you're in dire circumstances and certain you can repay the loan with interest.

Unsecured personal loans can be a good option if you have strong credit, as they don't put your car at risk if you default. But if you have bad credit, you may expect higher interest rates and less attractive borrowing terms.

If you're struggling to make monthly payments, refinancing your car loan may be a good option, as you may be able to pay less by getting a lower interest rate.

Here are some alternatives to equity auto finance:

These options may be worth considering in a financial emergency, as they can provide quick access to funds with more affordable terms. However, be sure to carefully evaluate the terms and conditions of each option before making a decision.

You may be able to qualify for an auto equity loan with less-than-perfect credit because the loan is secured by the value of your vehicle. Exact credit score requirements vary from one lender to the next, so it's essential to research credit requirements before applying.

Some lenders offer pre-approval applications that allow you to check your eligibility and potential rate with only a soft credit inquiry. This can give you an idea of which types of loans might be a good fit for you.

Applying for an auto equity loan can have a slight negative impact on your credit score due to the hard credit inquiry. However, if you qualify for a new auto equity loan and the lender reports the account to the credit bureaus, it could also help you build positive credit if you always pay on time.

A well-managed auto equity loan can help you build positive credit, but making late payments or defaulting on your debt can damage your credit score instead.

Here are some potential credit score impacts of auto equity loans: