What Is an Auto Equity Loan?

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Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

, Content Manager - May 26, 2021

Need some cash? Then an auto equity loan may be the solution for you. There are some requirements to qualify for one, so here’s what we know.

How Auto Equity Loans Work

An auto equity loan is when a lender gives you a loan for the amount of your vehicle’s value or its current equity. For example, if your vehicle is worth $5,000 and you don’t have a loan on it, then you may be able to get an auto equity loan for $5,000. To qualify for an auto equity loan, you may need to own the vehicle outright, depending on the lender you’re working with.

If you still owe money on your vehicle and you want an auto equity loan, then the difference between your loan balance and your car loan is your equity. If you owe more on your vehicle than it’s worth, you’re in a negative equity position and aren’t eligible for an auto equity loan.

You must have equity in order to qualify. If you’re on the edge of breaking even, or you only have a little bit of equity, then going through the process may not yield you much cash or even be worth your time.

An auto equity loan is a secured loan, and your vehicle is used as the securing collateral. If you stop making payments on the loan, your vehicle could be at risk for repossession. For this reason, auto equity loans are generally considered a last resort option for borrowers in need of quick cash.

Additionally, you may need to plan for a short loan term. Many auto equity lenders only provide two- to three-year repayment plans, depending on the size of the loan. Be aware that your interest rate can vary on this type of loan, too. The interest rate you qualify for may be lower than a personal loan since auto equity loans are secured by the vehicle, but it's not a guarantee. Your interest rate, loan term, and monthly payment all depend on your current income, vehicle equity, and your credit score.

Is an Auto Equity Loan a Good Idea?

It can be a little risky to consider an auto equity loan, especially if your car’s already paid off. However, if you’re looking to build up your credit score a little more with some payment history, or you need the extra cash for other expenses, it could be a good move.

Here are some situations when an auto equity loan may a good idea:

  • You need the cash to prevent default on other bills or loans
  • You were gifted the vehicle you plan to use to get an auto equity loan, and you want to build some credit history
  • You’re planning on using the money from an auto equity loan to repair your vehicle
  • You know you can comfortably afford to repay the auto equity loan
  • Your vehicle’s in good condition

If your vehicle is over 10 years old or has more than 100,000 miles, then a lender may not be able to approve you for an auto equity loan. Typically, auto lenders prefer to finance newer cars that have less risk of mechanical breakdown, and this applies to refinancing lenders as well.

The Bottom Line

It’s not always a good idea to go through with an auto equity loan. If you still owe on your vehicle and you cash out all of its equity, then your vehicle may be at risk for being in a negative equity position. Additionally, make sure that you can afford the auto equity loan payments, or default and subsequent repossession could happen. Examine your options carefully and compare rates, loan terms, and check your vehicle’s equity position to see if it’s worth it for you.

In some cases, it may be worth it to sell your car and pocket the profits instead of cashing out the equity. Used car values are high right now, and it could yield you extra cash. And for borrowers in need of another car loan, we want to help with that.

CarsDirect has cultivated a nationwide network of dealerships that assist borrowers with unique credit situations. If your credit score is getting in the way of your auto loan needs, then fill out our free auto loan request form. We’ll look for a dealer in your local area at no cost and no obligation.


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, Content Manager

Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

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