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What is an auto equity loan and should I get one?

What is an auto equity loan and should I get one?

We have never had so many options when it comes to auto loans. Sometimes too many options can be as bad as not enough, especially when they cause confusion. We get a lot of enquiries around auto equity loans and it’s something we think worthy of a blog post.

Auto equity loans

An auto equity loan is a personal loan where you use any equity in your car as collateral. You don’t have to own your car outright but it does need to be worth more than the outstanding value of any loan you have on it.

Let’s say you have a car worth $20,000. You have a loan secured on the car that was originally for $18,000 but you have paid half so far. So you have a $20,000 car with $9,000 of finance remaining.

That means you have $11,000 in equity. The value of the car less the outstanding finance.

If you needed to, you could use that equity as security for a personal loan to pay off other debts or borrow for any reason you like.

Are auto equity loans a good idea?

Like any borrowing, an auto equity loan could be a good idea for some but not for others. It all depends on your situation.

The pros of an auto equity loan include:

  • Longer loan terms – You can borrow money over a longer term with lower monthly payments.
  • High rate of acceptance – As the loan is secured on equity, most lenders will lend to you.
  • You don’t have to own the car outright – As long as you have equity in your car, you can get a loan.

The downsides of an auto equity loan include:

  • Not the cheapest loan – Auto equity loans can be expensive and often cost more than a standard personal loan.
  • You could lose your car – If you default, you not only take a hit on your credit score, you could lose your car too!
  • You may not be comfortable with two loans on one asset – If having a car loan plays on your mind, having two loans secured on a car will only add to that.

Auto equity loans can be useful if you need cash in a hurry and will be in a position to pay it off quickly. They can also be useful if you have bad credit and wouldn’t be able to raise money using a standard loan.

They don’t work for everyone though so we would recommend discussing it with our team before you apply to ensure you know exactly what you’re letting yourself in for.

 

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