A personal loan lets you borrow money without any collateral, but with a car loan, you can borrow money against the value of your car. And while a secured loan may mean a lower interest rate, you’ll need to consider the benefits and risks that come with a home equity loan before taking one out.
What is a car equity loan
An auto equity loan is a variant of a personal loan. You can use the funds for any purpose, as long as there is equity in your vehicle.
Equity loans allow you to borrow money against the value of your car. If your car is worth $25,000 and you have a loan balance of $10,000, you have $15,000 of equity that you can potentially borrow against. With an auto loan, you can borrow up to 100% of the equity in your car, up to a specified limit.
Since the loan is secured by your vehicle, it is likely that you can get a lower rate than a normal personal loan. However, since your car will be used as collateral, it is at risk of being repossessed if you don’t make your payments on time.
If you are looking for an auto equity loan, check with your bank or credit union first. They may offer the service or they may have a partner they can put you in touch with.
The benefits of an equity loan
A car loan can have many advantages.
- Faster approvals. For those with bad credit, an auto loan can mean quick approval. Because you can use the equity in your car as collateral, the bank can make sure they get their money back.
- Larger loans. As with any equity loan, the amount you can borrow is partly determined by the equity in your car. Someone with a $10,000 car and $5,000 in equity might get up to $5,000 in loan, for example, while someone with a lesser car might not be able to. get a loan at all.
- Low interest rates. The interest rate you receive on an auto loan is directly related to your credit score and the value of your car. This means that if your car is worth a lot, you might be able to get a good rate, even with less than perfect credit.
Disadvantages of a car equity loan
There are also a few downsides to taking out a car loan.
- The vehicle is a warranty. A car loan uses your car as collateral. This means that if you stop making payments, the lender can repossess your vehicle to recover their losses.
- Hard to find. Auto equity loans are not common. If you are looking for an auto loan, check with your bank or credit union first. They may offer the service or they may have a partner they can put you in touch with.
Who is the best auto loan for?
The people most likely to benefit from a car equity loan meet a few criteria.
- Have equity in your car. The most important part of being a good candidate for a car loan is having enough equity to take out a loan.
- Can afford payments. Since your car will be at stake, it is important to know that you will be able to make payments every month. Failure to do so may result in your vehicle being repossessed.
- Interest rates are lower for you. If interest rates on a stock auto loan are lower than traditional personal loans and other credit options, it may be a good idea to opt for this uncommon type of loan rather than something more. readily available.
Alternatives to a car equity loan
If you can’t get an auto equity loan or the application process isn’t going as smoothly as you’d like, you might want to consider loan options that don’t require your car.
Like a car equity loan, a home equity loan depends on the equity in your home. Generally, you can borrow up to a percentage of the equity you have or a predetermined ceiling. If you own your home, this can be a viable alternative.
Personal loans are a solid alternative to a car loan, but the rates will likely be a bit higher since they are unsecured. The process of getting a personal loan is similar to a car loan and can be done in person or online with a number of lenders.
Although they are an alternative, credit cards are generally much more expensive than a personal loan or a secured loan. However, they are also easier to obtain and you could have instant access to credit after approval.
A car loan can be a good idea if you are looking for a low interest loan. But it’s important to budget accordingly, because your vehicle will be at risk if you can’t make payments.