Ever heard of an auto equity loan? Been offered one but don’t know what it is? An auto equity loan, as its name suggests, uses equity to secure the loan against. It is useful for those who are rebuilding their credit score or who have a low score. It is not a car loan but a personal loan secured against your car. This is the main confusion when discussing this type of loan and why I’m covering it today.
Like a home equity loan that is secured on your home, an auto equity loan is secured on the car. If anything happens, the car is recovered so the lender can recoup their money. It’s a form of security that means some lenders are more willing to lend than they otherwise would be.
To clarify, an auto equity loan is a standard personal loan that uses your car as collateral. It is not a form of auto finance.
The upside to an auto equity loan is that a wider selection of loans are available to those with poor credit scores. As the car is used as security, the risk to the lender is lower, so you can get a decent deal.
The downside to an auto equity loan is that you could lose the car if you miss payments or have trouble with the loan. This is an extreme situation and is unlikely to happen if you can come to an arrangement with the lender but is certainly a possibility. Auto equity loans tend to be more expensive than standard personal loans too.
The amount you can borrow depends on the value of your car and how much of it you own. For example, if your car is worth $10,000 and you have paid off $7,000, you could theoretically borrow that $7,000.
Do auto equity loans offer value?
Most auto equity loans are more expensive than a standard loan. It should not be your first option but can be used as a last resort if necessary. Rates are often higher than on standard personal loans and the rate you’re offered depends on how much your car is worth and how much of it you own.
If you’re planning to use an auto equity loan to purchase a car, we would advise against it. Car Nation Canada has a range of loan options available to those with poor credit histories or who are rebuilding their score. Many of them will offer much lower rates and not use your car as collateral.
We would always suggest a car loan for a car and personal loans for other things. Car loans are designed for purpose and offer the competitive rates and terms you look for in car finance.
If you need a loan or have a car in mind, visit any Car Nation Canada dealership. Our experts will be only too happy to help!