How to Use an Auto Equity Loan When You Need the Money

The last few years have been one wild ride for most everyone, with just about every aspect of our lives transformed in ways great and small. This kind of chaos is hard enough when you’re flush with cash, but when money gets tight, inflation soars, and an emergency suddenly presents an enormous bill for you to pay, things can get grim.

If you don’t have a solid emergency fund to carry you through an emergency, the most common solution is to borrow money. Using credit cards to handle a sudden debt is an easy solution, but those interest rates often will make you regret the decision—and any sort of payday loan will have the same result. What you need is a secured loan based on collateral, like a home equity loan—but that’s no help if you’re renting. And that’s where your car can come in: Just like a home equity loan, you might be able to get an auto equity loan, even if you still owe money on the vehicle.

Here’s how auto equity loans work.

What is the difference between an auto title loan and an auto equity loan?

The first thing to understand is that there are two ways to borrow against your car: An auto equity loan and an auto title loan. You’ll want to avoid the latter like the plague, as it’s basically a high-interest payday loan that happens to put a lien on your car’s title. They tend to be very short-term and easier to get, which is why people fall for them, but they’re a bad deal and if you fall behind on the payments, you could lose your car.

An auto equity loan, on the other hand, is usually offered by a traditional lender, like your bank. It’s a secured loan using your equity in the car as collateral, so the interest rates are reasonable and the payments will be clear and fixed.

How to calculate your equity in your car

The first step to getting an auto equity loan is to figure out what you might be able to borrow. This is a pretty straightforward process:

Determine how much you still owe on the car. If you’ve paid off the loan (or bought it for cash in the first place), this number is obviously zero. Determine the car’s current value by checking with Kelley Blue Book or Autotrader or some other resource. (Prepare to be disappointed—cars lose value fast.)Subtract the first number from the second. That’s both your equity in the car and the potential value of your auto equity loan. That doesn’t mean it’s what a bank or other lender will actually offer you—they will have their own weird math to figure out how much risk they’re willing to take on.

For example, if you have a 2018 Ford Taurus in excellent condition, its current estimated value is about $18,500. If you owe $5,000 on the loan, you could potentially borrow $13,500 from your equity. While some lenders will let you borrow 100 percent of your equity in the car, many won’t be willing to loan you that much, but it’s a good starting point.

The process of getting an auto equity loan is similar to any other loan. You identify a lender that offers auto equity loans (not all lenders do—most large banks don’t, so you’ll likely have to explore smaller, local banks or online banks like Mariner Finance), fill out the application, and go through whatever other steps the lender requires. The process tends to be pretty fast as long as everything is in order. With online lenders, you can often have an approval—and the cash—within one day, but shopping around for the best rates might be worth a little delay if you have the time.

The downside

While an auto equity loan is better than a payday loan and can be a great solution for a short-term cash crunch, there are some downsides to consider:

Risk. You’re borrowing money using your car to secure the loan, which means you could lose the car if you fail to pay the loan back. This could be especially galling if you had paid off your car loan or were close to doing so. Hidden costs. Some lenders pack in extra fees because an auto equity loan isn’t common and is perceived as a higher risk than other loans, so make sure to read all the fine print. And since it’s expensive to be poor, lenders might require you to carry comprehensive auto insurance to protect their asset, so you’ll wind up with higher monthly payments on top of everything else.

The bottom line? If you’ve got a short-term need for cash and have a lot of equity in your car, an auto equity loan is a relatively stable way to cover the gap. But exploring other options first might make sense, and you should always keep the risks in mind.