Vehicle Equity Loans for Beginners: How to Use Your Car as Collateral
If you need money quickly, one solution is a loan. A bank or credit union can lend you money that you’ll repay with interest. If you can offer collateral on the loan, you can typically secure better rates or terms on the loan. With a vehicle equity loan, you’ll use your car as collateral. Here’s how it works.
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What is a vehicle equity loan?
Financial institutions can loan you money if you offer certain assets as collateral. A home equity loan is the most popular type, in which one’s house is offered as security for a loan. If you need a much smaller loan or don’t own a house, you can offer your automobile, motorcycle, RV or other valuable vehicle as collateral. This is an auto equity loan.
Oftentimes, financial institutions offer car equity loans at competitively low interest rates, which can be lower than the average interest rate on credit card debt and student loans. You could use the value of your car to get rid of high interest debt if you secure a vehicle equity loan at a good rate. It’s also a quick way to get emergency cash, as vehicle equity loans typically involve simple application processes.
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What you need to know about auto equity loans
According to NerdWallet, only community banks and credit unions usually offer vehicle equity loans; major banks do not. So, you might have to go beyond your usual financial institution to receive one. Make sure the establishment is reputable and trustworthy, because shady lenders could take advantage of your desperation by offering terrible rates or mishandling your credit reporting.
Vehicle equity loans are based on the car’s value (a combination of industry valuation guides and internal appraisals) and your credit score. The vehicle can’t have a lien on it — which means you’ve paid off the car in full and don’t anything on it. Otherwise, you don’t really “own” the asset to offer it as collateral. You’ll relinquish the title of the vehicle to the lender until you’re able to repay the loan.
Keep in mind that using your vehicle as collateral means that if you default on it, the lender can seize possession of the car to resolve the balance. So, most financial advisers only recommend it in emergency situations. Choosing to take out a vehicle equity comes with risks and should only be done if you can repay it on time.
Aaron is unashamed to be a native Clevelander and the proud driver of a Hyundai Veloster Turbo (which recently replaced his 1995 Saturn SC-2). He gleefully utilizes his background in theater, literature, and communication to dramatically recite his own articles to nearby youth. Mr. Widmar happily resides in Dayton, Ohio with his magnificent wife, Vicki, but is often on the road with her exploring new destinations. Aaron has high aspirations for his writing career but often gets distracted pondering the profound nature of the human condition and forgets what he was writing… See more articles by Aaron.