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Home > Car Equity Loan – How it works?

Car Equity Loan – How it works?

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Shir Amram

Written by: Shir Amram

Considering an auto equity loan to navigate through your financial tight spots?

An auto equity loan provides immediate cash by leveraging your car’s value, regardless of whether it’s fully paid off. 

This secured personal loan often offers lower interest rates compared to alternatives like auto title loans or payday loans.

Key Takeaways

  • Car equity loans provide swift access to funds by leveraging your vehicle’s value, even if it’s not fully paid off.
  • Auto equity loans often present lower interest rates compared to alternatives like auto title loans or payday loans.
  • Car equity loans offer a viable option, especially for those with bad credit who can’t obtain regular loans from traditional lenders.
  • Factors like proof of income and your car equity play a significant role in determining loan eligibility.
  • While car equity loans have advantages like easy approval and flexible loan amounts, borrowers must be aware of potential risks like high-interest rates and the risk of repossession.
  • If you have any questions or need assistance, our team is available to help you via online communication or by phone at 800-700-8900.

What Is an Auto Equity Loan?

An auto equity loan is a secured loan that allows you to use the equity in your vehicle as collateral. It’s a financial tool that enables you to borrow money based on the appraised value of your car.

Understanding Car Equity Loans

Car equity loans operate by leveraging the difference between your car’s value and the amount you owe on it, known as equity. 

For example: If the worth of your car is $15,000 and you owe $5,000, you have $10,000 in equity available for potential borrowing. This equity serves as a valuable asset for borrowing purposes. 

Some lenders allow borrowing up to 100% or even 125% of the car’s equity, depending on your creditworthiness.

This type of loan provides quick access to cash, making it a valuable resource in emergency situations. Moreover, as your vehicle serves as collateral, car equity loans are generally easier to obtain and often have lower APRs than unsecured loans, such as personal loans or credit cards. 

This makes them a more accessible option, especially for borrowers with bad credit.

Few Key Points to Be Aware of:

By understanding these auto equity loan aspects, you can make an informed decision and ensure that an auto equity loan is the right choice for your financial needs.

  1. Collateral: An auto equity loan uses your car as collateral, so if you default on the loan, you risk losing your vehicle.
  2. Interest Rates: Auto equity loans often come with higher interest rates compared to traditional loans, so it’s essential to understand the terms and costs involved.
  3. Repayment Terms: Be aware of the loan’s repayment schedule and make sure you can comfortably meet the payments.
  4. Loan Amount: The loan amount is determined by your car’s value, so it’s crucial to get an accurate appraisal to know how much you can borrow.
  5. Responsible Borrowing: Only take out an auto equity loan if you genuinely need the funds and have a plan for repayment to avoid financial difficulties down the road.

Calculating Your Car’s Equity

1. Find Out How Much Your Car is Worth:

2. Subtract What You Owe:

  • Take away the amount you still owe on your car loan from its value.
  • If you get a positive number, that’s your equity. If it’s negative, you owe more.

3. Example:

  • If your car is worth $12,000 and you owe $3,000, your equity is $9,000.
  • If you own your car outright, your equity is the same as its value.

Assessing Your Eligibility for a Car Equity Loan

While the equity in your car is a key factor, lenders will also review your credit reports and require proof of income and employment.

Keep in mind that the terms of your auto equity loan can have a significant impact on your financial stability. It’s crucial to select loan terms that result in manageable monthly payments. 

Failure to meet these payments could result in the repossession of your car and negative effects on your credit score.

Credit Score Requirements

The loan rates offered for an auto equity loan greatly depend on your credit score. Credit score requirements for auto equity loans vary between lenders, so it’s essential to research before applying.

Having your car as collateral makes it easier to get an auto equity loan than an unsecured personal loan. If your car is worth more, you might get a better interest rate, even if your credit isn’t great.

Some lenders even provide auto equity loans to individuals with credit scores below 630, as reported by credit bureaus.

Income and Employment Verification

In addition to your credit score, lenders typically require proof of income and employment to ensure you have the means to repay the auto equity loan. 

  • Full-time employees: Typically offer W-2 forms or recent pay stubs for income verification.
  • Those with direct deposit: Can use bank statements for proof of income.
  • Self-employed individuals: May use tax returns and profit/loss statements to show income stability.

Proof of employment might not always be needed, but having a steady income is a good idea.

Weighing the Pros and Cons of Car Equity Loans

Before getting a car equity loan, like any financial decision, it’s necessary to weigh the Advantages and disadvantages.

Pros of an Auto Equity Loan

  1. Easy Approval: Unlike traditional loans, car equity loans have lower eligibility criteria, making it easier for individuals with bad credit or financial challenges to get approved.
  2. Access to Quick Cash: With a car equity loan, you can access fast cash by leveraging the value of your vehicle, providing a convenient solution for emergency expenses or financial needs.
  3. Keep Your Car: During the loan period, you can continue driving your car as usual. The lender only holds the title as collateral, so you can maintain your daily routine.
  4. Flexible Loan Amount: Depending on your car’s value, you may qualify for a loan ranging from a few thousand dollars to tens of thousands, allowing you to borrow the amount that meets your specific financial requirements.
  5. Convenient Application Process: Car equity loans typically have a straightforward application process, with minimal paperwork and quick approval, ensuring you can get the funds you need without delays.
  6. No Prepayment Penalties: Some car equity loans come with the advantage of no prepayment penalties, giving you the flexibility to pay off your loan ahead of schedule without incurring additional fees.

Overall, a car equity loan can be an excellent option for individuals looking for a quick and accessible way to secure funds without the constraints of traditional lending options.

Cons of an Auto Equity Loan

  • High-Interest Rates: Auto equity loans often come with higher interest rates compared to traditional loans, increasing the overall cost of borrowing.
  • Risk of Repossession: Since auto equity loans use your vehicle as collateral, defaulting on the loan can lead to repossession, and you may lose your car.
  • Limited Loan Amounts: The loan amount is determined by your car’s value, so you may not be able to borrow a large sum of money, depending on the vehicle’s worth.
  • Impact on Credit Score: Defaulting on the loan or missing payments can negatively affect your credit score, making it harder to qualify for future loans or credit.

Comparing Car Equity Loans to Other Financing Options

Comparing car equity loans with other financing options is crucial. This ensures you make an informed decision about the best borrowing option for your situation. 

Keep in mind that the most suitable loan type can vary depending on factors such as:

  • your credit score
  • financial stability
  • borrowing needs
  • personal circumstances

Personal Loans vs. Car Equity Loans

Personal loans and car equity loans are both borrowing options, but they have different features. Personal loans are typically unsecured, while car equity loans use your car as collateral, making them secured loans.

However, there are some differences between personal loans and car equity loans. Here are a few things to consider:

  • Personal loans typically have higher interest rates than car equity loans because they are unsecured loans.
  • Personal loans may have more stringent lending requirements, making it difficult for consumers with poor credit scores to qualify.
  • Car equity loans may be easier to obtain with a mediocre credit history.

Auto Title Loans vs. Car Equity Loans

Car title loans and auto equity loans are closely related, but they have some key differences. Car title loans require you to fully own your vehicle. On the other hand, auto equity loans can be obtained even if the car is not paid off.

The amount that can be borrowed with an auto loan is usually higher compared to an auto equity loan. This is because it uses a fully owned vehicle as collateral. However, interest rates for auto title loans may be higher. This makes them less advantageous for some auto title loan borrowers in certain cases.

Home Equity Loans vs. Car Equity Loans

A car loses value over time, but a home often goes up in value. This can change how long it takes to pay back a home equity loan.

Historically, home equity loans had lower interest rates than car loans. However, as of December 2023, new car loan APRs tend to be lower than home equity loan APRs. Additionally, home equity loans may include closing costs, which car equity loans typically do not require.

Tips for Securing a Car Equity Loan

Unlocking the potential of car equity loans starts with understanding the process and knowing what to look for. 

Here are some practical tips to guide you through securing the right loan for your needs.

Choose the Right Lender

Picking the right lender is important. Not all banks offer car equity loans, so start with your bank or credit union. Compare offers from different lenders to find the best deal, focusing on interest rates to ensure you can afford it.

Check Loan Offers

Once you find potential lenders, look at their loan offers. Check the annual percentage rate (APR) to see how much the loan costs overall. Good loan features include low, fixed APRs and flexible terms. Look at these factors to find the best offer.

Protect Your Credit Score

Keep your credit score safe when applying for a car equity loan. Try to limit full loan applications to avoid too many hard inquiries. Pay your loan on time to avoid hurting your credit score. Manage your debt well to secure your financial future while using your car’s value.


For borrowers with bad credit, car equity loans can be a valuable financial tool, providing quick access to funds and potentially easier qualification. Additionally, they may offer lower APRs compared to an unsecured personal loan. 

However, it’s important to recognize that like any financial decision, they come with their fair share of risks and responsibilities.

Should you have any inquiries, our team stands ready to assist you via online communication or by phone at 800-700-8900.

Frequently Asked Questions

Can I Get a Loan on The Equity of My Car?

Yes, you can get a loan using the equity in your car even if it’s not fully paid off. Depending on the lender and your creditworthiness, you may be able to borrow up to 100% or even 125% of your car’s equity. 

This type of secured loan might offer a lower interest rate than other options.

How Does Equity on a Car Work?

Equity in a car refers to the difference between its value and the amount you owe on it. For example, if your car is valued at $50,000 and you still owe $7,000, you have $13,000 in equity.

What is The Interest Rate on an Auto Equity Loan?

The interest rate on an auto equity loan can range from 6% to 36%, and is typically determined based on your credit score and your car equity. So, it’s important to understand the impact of your credit score on the interest rate offered.

Can I Take out a Loan Against My Car?

Yes, you can take out a loan against your car. Known as a car title loan or pink-slip loan, this type of loan enables you to leverage your vehicle as collateral for borrowing money.

Typically, car title loans allow borrowers to access 25 to 50 percent of their vehicle’s value in exchange for temporarily surrendering the vehicle’s title to the lender as collateral.

What is The Difference Between Car Equity Loans and Auto Loans?

Car equity loans and auto loans both use your vehicle as collateral.

An auto loan often requires full ownership of the vehicle. Car equity loan may be available even if you haven’t paid off your car loan entirely.

An auto loan may offer a higher loan amount. However, it usually comes with higher interest rates compared to a car equity loan.

Shir Amram

Written by

Shir Amram

Shir Amram is a senior loan officer at Montana Capital Car Title Loans. With over 10 years of experience in the finance industry, Shir has been an asset in her role and has contributed significantly to our company’s success, Shir’s academic background in economics and financial knowledge helps us fulfill our education mission as she creates a valuable content to our blog. 

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