An auto equity loan lets you borrow money using your car as collateral
An auto equity loan is a loan secured by the equity you have built up in your vehicle. If you own a car outright or have paid down a significant portion of your auto loan, you can borrow against that equity. The lender places a lien on your car, meaning they have a legal claim to it if you stop making payments. Unlike an unsecured personal loan, an auto equity loan typically carries a lower interest rate because the lender has collateral to recover if you default.
The amount you can borrow depends on your car's current market value minus what you still owe on any existing loan. If your car is worth $15,000 and you owe $8,000, you have $7,000 in equity. Most lenders will let you borrow a portion of that equity—often 50 to 90 percent—depending on the car's age, condition, and your credit history.
Auto equity loans are different from refinancing an existing auto loan. Refinancing replaces your current loan with a new one, usually to get a better interest rate or change your payment term. An auto equity loan is a separate, second loan on top of any existing auto loan you may have.
Key Takeaways
- An auto equity loan borrows against the value you have built up in your car, with the car serving as collateral for the lender.
- The amount you can borrow is based on your car's current market value minus any outstanding loan balance, typically 50 to 90 percent of that equity.
- Interest rates on auto equity loans are usually lower than personal loans but higher than rates on primary auto loans, and they vary based on credit score and lender.
- If you default on an auto equity loan, the lender can repossess your car, even if you are current on a first loan held by another lender.
- Auto equity loans come with closing costs, which may include title work, appraisal fees, and loan origination fees ranging from a few hundred to over a thousand dollars.
How lenders determine how much you can borrow
The lender will order an appraisal or use an automated valuation model to determine what your car is worth on the current market. They will then check your loan records to find out what you still owe. The difference is your equity. Most lenders cap the loan amount at 50 to 90 percent of that equity, depending on the vehicle's age and their own lending standards.
A 10-year-old car with higher mileage will typically may have access to for a lower percentage of equity than a newer vehicle. A car with mechanical problems or accident history may not be approved at all. Some lenders specialize in older vehicles and will work with cars up to 15 or 20 years old, while others have a hard cutoff at 10 years.
Your credit score also affects the amount you can borrow and the interest rate you will receive. A higher credit score generally means you can borrow more and pay less in interest. If your credit is poor, some lenders may decline you or require a co-signer.
Interest rates and fees you will encounter
Auto equity loan interest rates typically range from 8 to 29 percent, depending on your credit score, the lender, and current market conditions. Rates vary significantly between lenders, so comparing offers is essential. A borrower with excellent credit might receive a rate around 8 to 12 percent, while someone with fair or poor credit could face rates of 18 to 29 percent or higher.
Beyond the interest rate, you will pay closing costs. These include a title search fee (usually $50 to $200), an appraisal fee ($100 to $300), a loan origination fee (often 1 to 5 percent of the loan amount), and possibly a document preparation fee. Some lenders bundle these into the loan amount; others charge them upfront. A $5,000 auto equity loan might carry $500 to $1,000 in total closing costs.
If you pay off the loan early, some lenders charge a prepayment penalty, though many do not. Always ask whether early repayment carries a fee before you sign.
The risk of losing your car if you default
The biggest risk of an auto equity loan is repossession. If you miss payments, the lender can repossess your car without going to court in most states. This is different from an unsecured loan, where the lender must sue you to collect. With an auto equity loan, the car itself is the collateral, and the lender has the right to take it back.
If you have a first loan on the car from another lender and you default on the auto equity loan, the second lender can still repossess the vehicle. This can happen even if you are current on your primary auto loan. The second lender's lien is junior to the first, but they still have the legal right to seize the car.
Repossession damages your credit score and can make it harder to borrow in the future. You may also owe a deficiency judgment if the car sells for less than what you owe on both loans combined. For example, if you owe $8,000 total and the car sells at auction for $6,000, you could be liable for the $2,000 difference.
When an auto equity loan makes sense versus alternatives
An auto equity loan is most useful when you need cash and have built up significant equity in a paid-off or nearly paid-off car. The interest rate is usually lower than a personal loan or credit card, making it cheaper to borrow if you have good credit. If you need $5,000 to $15,000 and can afford the monthly payments, an auto equity loan may be worth considering.
A personal loan is a better choice if you want to avoid putting your car at risk. Personal loans are unsecured, so the lender cannot repossess your vehicle if you default. Interest rates on personal loans are typically higher than auto equity loans but may be competitive if your credit is strong. Personal loans also have no closing costs at many lenders.
A cash-out refinance of your existing auto loan is another option if you still owe money on the car. This replaces your current loan with a new one for a larger amount and gives you the difference in cash. The advantage is a single payment instead of two loans. The disadvantage is that you extend the loan term and pay more interest overall.
A home equity loan or line of credit is cheaper if you own a home, since mortgage rates are lower than auto rates. However, this puts your house at risk instead of your car, which is a serious consideration.
What happens during the process and funding process
The process process typically starts online or in person at a bank, credit union, or specialized auto equity lender. You will provide basic information about yourself, your income, and your vehicle. The lender will pull your credit report and order an appraisal of your car.
Once approved, you will sign loan documents and a promissory note. The lender will file a lien against your vehicle's title with your state's motor vehicle department. This process usually takes 3 to 7 business days. You will receive the funds by check, direct deposit, or wire transfer, depending on the lender's process.
During this time, you remain the registered owner of the car and can continue driving it. The lien straightforward gives the lender a legal claim to the vehicle if you default. Your car insurance requirements may change—some lenders require you to maintain comprehensive and collision coverage, not just liability.
How to compare auto equity loan offers
Request quotes from at least three lenders before deciding. Compare the interest rate, the total closing costs, the monthly payment amount, and the loan term. A lower interest rate does not always mean the lowest total cost if closing fees are high or the term is long.
Ask each lender for a Loan Estimate, which shows the interest rate, monthly payment, total interest paid over the life of the loan, and all fees. This document is required by federal law and makes it easier to compare offers side by side.
Check whether the lender reports payments to the credit bureaus. Payments on an auto equity loan can help build your credit if the lender reports them. Some smaller lenders do not report, which means the loan will not help your credit score even if you pay on time.
Read reviews of the lender on the Consumer Financial Protection Bureau's website and on independent review sites. Look for complaints about hidden fees, poor customer service, or aggressive collection practices.
Frequently Asked Questions
Can I get an auto equity loan if I still owe money on my car?
Yes, as long as you have equity. If your car is worth $12,000 and you owe $7,000, you have $5,000 in equity that you can borrow against. The second lender's lien will be junior to the first lender's lien, meaning the first lender gets paid first if the car is sold.
What is the difference between an auto equity loan and a title loan?
A title loan is a short-term, high-interest loan where you hand over your car's title to the lender. Title loans typically have terms of 30 days and interest rates of 25 to 300 percent. An auto equity loan is a longer-term loan with lower rates and you keep your title. Title loans are predatory and should be avoided.
Will an auto equity loan hurt my credit score?
The process will trigger a hard inquiry, which may lower your score by a few points temporarily. Once you take out the loan, your credit mix improves because you now have an installment loan. If you make payments on time, your score should recover and improve over time.
What happens if my car is damaged or totaled while I have an auto equity loan?
Your insurance company will pay the claim to you and the lender based on the lien position. If the car is worth less than you owe on both loans, you may owe the difference. This is why lenders require comprehensive and collision coverage on vehicles with auto equity loans.
Can I pay off an auto equity loan early without a penalty?
Many lenders allow early repayment without penalty, but some charge a prepayment fee of 1 to 5 percent of the remaining balance. Always ask about this before you sign the loan agreement. Paying early saves you interest, so even a small penalty may be worth it.