What an auto equity loan is and how it works

An auto equity loan is a loan you take out using your car as collateral. You borrow money based on how much your car is worth minus what you still owe on it — that difference is your equity. The lender puts a lien on your car's title, meaning they have a legal claim to it if you don't repay the loan.

The process is straightforward: you contact a lender, they verify your car's value (usually through an online tool or inspection), subtract your existing loan balance, and offer you a loan for a percentage of that equity. If your car is worth $15,000 and you owe $8,000, your equity is $7,000. A lender might offer you a loan for $4,000 to $5,500 of that equity. You receive the money, and you make monthly payments just like any other loan.

The key difference from a personal loan is that the lender has a claim on your car. If you stop paying, they can repossess it — even if you're current on your original car loan. This is why auto equity loans typically have lower interest rates than unsecured personal loans: the lender's risk is lower because they can take back the car.

Key Takeaways

  • An auto equity loan lets you borrow money using your car's value as collateral, and the amount you can borrow depends on how much equity you have built up.
  • Interest rates on auto equity loans are usually lower than personal loans because the lender can repossess your car if you don't pay, but rates still vary widely by lender and credit score.
  • You need a car that is paid off or nearly paid off to have enough equity to borrow against, and the car must be in your name.
  • If you miss payments, the lender can repossess your car even if you're current on your original auto loan, leaving you without transportation.
  • The money from an auto equity loan can be used for any purpose — medical bills, debt consolidation, home repairs — but borrowing against your car is risky if you depend on it for work or daily life.

How much you can borrow and what determines the amount

The amount a lender will offer depends on three things: your car's current market value, what you still owe on it, and the lender's policy on how much of your equity they'll lend out.

Most lenders will lend you 50 to 75 percent of your equity, not the full amount. If you have $7,000 in equity, expect offers between $3,500 and $5,250. Some lenders go higher, but that increases their risk and yours. The lender determines your car's value using tools like NADA Guides or Kelley Blue Book, or by sending an inspector to look at it. Newer cars and those in good condition are worth more, so a well-maintained vehicle gives you access to more money.

Your credit score affects the interest rate you're offered, not the amount you can borrow. A score of 700 or above typically gets you better rates than a score below 650. However, some lenders specialize in lending to people with lower scores and will still offer you a loan — just at a higher rate. The loan term (how many months you have to repay) also matters: a 36-month loan has higher monthly payments but costs less in interest overall than a 60-month loan.

Interest rates and fees you'll encounter

Interest rates on auto equity loans vary by lender, your credit score, and the loan term. Rates typically range from 9 percent to 30 percent annually, though this varies significantly. A lender offering 12 percent APR to someone with a 750 credit score might offer 22 percent to someone with a 600 score. The only way to know your actual rate is to contact lenders and get quotes.

Beyond interest, watch for these fees: origination fees (1 to 8 percent of the loan amount, charged upfront), prepayment penalties (charged if you pay off the loan early), and late fees (typically $15 to $30 per missed payment). Some lenders charge inspection fees if they send someone to look at your car. A few lenders advertise "no fee" loans but compensate by charging higher interest rates. Read the loan agreement carefully — the APR (annual percentage rate) includes interest but not all fees, so ask the lender for the total cost of the loan in dollars, not just the rate.

Who offers auto equity loans and where to find them

Auto equity loans come from several types of lenders. Credit unions often have the lowest rates if you're a member, typically 9 to 18 percent depending on your credit. Banks offer them but are more selective about credit scores. Online lenders like LendingClub, Elevate, and OppFi specialize in auto equity loans and will work with lower credit scores, though rates are higher. Title loan companies are the most aggressive lenders in this space and charge the highest rates — sometimes 100 percent APR or more — but they approve almost anyone with a car.

Start by checking whether you belong to a credit union; if you do, get a quote there first. Then compare offers from at least two online lenders and one bank. Use LendingTree or Bankrate to see multiple offers at once without explore directly to each lender. Each quote is a "soft inquiry" that doesn't hurt your credit score. Once you've narrowed it down, explore directly to your top choice. Avoid title loan companies unless you have no other option — the rates are predatory and designed to trap borrowers in a cycle of rolling over loans.

The risks of using your car as collateral

The biggest risk is repossession. If you miss even one payment, the lender can legally repossess your car without warning in most states. You lose your transportation, which can cost you your job or make it impossible to handle daily responsibilities. Repossession also damages your credit score and stays on your credit report for seven years. You may still owe the remaining loan balance even after the car is sold, because the sale price is often less than what you owe.

A second risk is that you're borrowing against an asset that depreciates. Your car loses value every year. If you borrow $5,000 against a car worth $7,000, and the car depreciates to $6,000 within two years, you now owe more than the car is worth. If something happens and you need to sell the car, you'll have to pay the difference out of pocket.

The third risk is that you're adding a second lien to your car. Your original auto loan already has a lien on the title. When you take an auto equity loan, the new lender adds their lien. If you default on either loan, either lender can repossess. This complicates your situation if you want to refinance your original car loan or sell the car.

When an auto equity loan makes sense versus alternatives

An auto equity loan makes sense if you have significant equity in your car, a decent credit score (650 or above), and you need money for a specific purpose. The rates are lower than personal loans or credit cards, so if you're consolidating high-interest debt, an auto equity loan can save you money. It also makes sense if you're self-employed or have irregular income and can't get a personal loan.

It does not make sense if you depend on your car for work, if you have a low credit score and would face very high rates, or if you're already struggling with payments. In those cases, explore alternatives: a personal loan (if your credit allows), a 0 percent balance transfer credit card (if you have good credit and can pay it off within the promotional period), a home equity line of credit (if you own a home), or a loan from family or friends.

If you're facing a financial emergency, contact 211 or your local community action agency to see whether you may have access to for emergency information before borrowing. If you're behind on bills, a credit counselor from the National Foundation for Credit Counseling can help you understand your options for free.

how the process works and what documents you'll need

The process process takes 15 minutes to an hour online, or longer if you explore in person. You'll need your driver's license, proof of income (recent pay stubs or tax returns), proof of residence (utility bill or lease), and your car's title or registration. Some lenders also ask for your insurance information and a photo of the car's odometer and exterior.

The lender will run a soft credit inquiry (which doesn't hurt your score) and verify your car's value. If you're approved, you'll receive a loan offer with the interest rate, monthly payment, and total cost. You have the right to review this before signing. Once you sign, the lender records their lien on your car's title at your state's DMV or equivalent office. This takes a few days to a few weeks depending on your state. You'll receive the loan funds by check, direct deposit, or wire transfer, usually within 3 to 5 business days after signing.

During this time, your original car loan is unaffected. You continue making payments to your original lender as usual. Your new lender's lien is secondary to the original lender's lien, meaning if you default, the original lender has first claim to the car.

Frequently Asked Questions

Can I get an auto equity loan if my car is still being financed?

Yes, as long as you have equity. If your car is worth $12,000 and you owe $9,000, you have $3,000 in equity and can borrow against it. The new lender's lien is recorded as secondary to your original lender's lien. You'll continue making payments to both lenders.

What happens if I pay off the auto equity loan early?

Some lenders charge a prepayment penalty, typically 1 to 5 percent of the remaining balance. Others don't. Check your loan agreement before signing. If there's no penalty, paying early saves you interest and removes the lien from your car faster.

Can the lender repossess my car if I'm current on my original car loan?

Yes. The auto equity lender has a lien on your car independent of your original loan. If you miss a payment to the equity lender, they can repossess even if you're current on the original loan. You'd lose your car and still owe both loans.

How long does it take to get the money?

Approval typically takes 1 to 3 business days if you explore online. Once approved and after you sign the loan agreement, funds are usually sent within 3 to 5 business days by check, direct deposit, or wire transfer. Recording the lien at your state's DMV takes a few days to a few weeks.

What if I can't afford the monthly payment?

Contact your lender when ready — don't wait until you miss a payment. Some lenders offer forbearance (temporarily pausing payments) or loan modification. If you can't work something out, you're at risk of repossession. Explore whether you can refinance with a different lender or borrow from family to avoid losing your car.