If you need cash quickly, one solution is a loan. A bank or credit union can lend you money that you will pay back with interest. If you can provide collateral on the loan, you can usually get better rates or terms on the loan. With an auto equity loan, you will be using your car as collateral. Here is how it works.
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What is an auto equity loan?
Financial institutions can lend you money if you offer certain assets as collateral. A home equity loan is the most popular type, in which the home is offered as collateral for a loan. If you need a much smaller loan or don’t own a home, you can offer your automobile, motorcycle, recreational vehicle, or other valuable vehicle as collateral. This is an auto equity loan.
Often, financial institutions offer auto equity loans at competitive interest rates, which may be lower than the average interest rate on credit card debt and student loans. You can use the value of your car to get rid of high interest debt if you get an auto equity loan at a good rate. It’s also a quick way to get emergency cash, as vehicle equity loans usually involve simple application process.
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What you need to know about auto equity loans
According to NerdWallet, only community banks and credit unions typically offer vehicle equity loans; the big banks don’t. So, you may have to go beyond your usual financial institution to receive one. Make sure the establishment is reputable and trustworthy, as shady lenders could take advantage of your desperation by offering terrible rates or mismanaging your credit report.
Auto equity loans are based on the value of the car (a combination of industry assessment guides and internal ratings) and your credit score. The vehicle cannot have a lien on it – which means you’ve paid off the car in full and you don’t have anything on it. Otherwise, you don’t really “own” the asset to offer it as collateral. You will relinquish title to the vehicle to the lender until you are able to repay the loan.
Keep in mind that using your vehicle as collateral means that in the event of a default, the lender may seize possession of the car to adjust the balance. So, most financial advisers only recommend it in emergency situations. Choosing to take out equity in a vehicle is risky and should only be made if you can pay it off on time.
Aaron is not ashamed to be from Clevelander and the proud driver of a Hyundai Veloster Turbo (which recently replaced its 1995 Saturn SC-2). He happily uses his background in theater, literature and communication to dramatically recite his own articles to local youth. Mr. Widmar happily resides in Dayton, Ohio with his beautiful 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 reflecting on the deep nature of the human condition and forgets what he wrote … See more articles by Aaron.