How to Borrow Money Against Your Car
Did you know that in September 2021, the average new car in the US sold for a whopping $45,031? That may explain why folks in the country bought 7% fewer cars that month compared to August 2021.
However, motor vehicle prices have always been high (and on the rise), and the same goes for used cars. For instance, in June 2021, the average used vehicle sold for $26,500, a 27% increase from the year before.
Fortunately, it’s also because of that high cost that you can borrow money against your car. You can use your ride as collateral in exchange for one of two types of loans.
This guide details what those loans are, their pros and cons, and how to apply for them, so be sure to keep reading.
Auto Equity Loan
An auto equity loan is a loan secured by the equity you have in your vehicle. Equity, in turn, is the difference between your car’s current worth and how much you still owe on your car loan.
For example, let’s say your vehicle is worth $15,000, and you owe $5,000 on it. This means your equity is worth $10,000 ($15,000 minus $5,000).
How Much Can You Borrow With an Auto Equity Loan?
Some auto equity lenders allow you to borrow an amount equal to your total equity. So, using the example above, you can borrow up to $10,000.
However, other lenders only grant loans amounting to a set percentage of the equity. For instance, if the lender says you can only borrow 70% of your equity, you can only get up to $7,000 on a $10,000 equity.
Conversely, some lenders issue loan amounts higher than the borrower’s equity. For example, you may find a lender who can lend you up to 125% of your current equity. In this case, you can apply for a loan amount of up to $12,500 (125% or 1.25 multiplied by $10,000).
What Are the Requirements for Auto Equity Loans?
Your equity is the most crucial requirement; otherwise, lenders won’t grant you a loan. If you’re not sure how much your equity is, you can start by checking your car’s current value. You can visit the Kelly Blue Book or Edmunds site to get an estimate of your car’s worth.
Once you know your car’s value, subtract your car loan balance from this amount. That’s your equity, so use that as a guide when determining how much you can borrow. If you own the car outright, your equity should be about the same as the KBB or Edmunds estimate.
Next, compare equity lenders, which can be banks, credit unions, and online lenders. Either way, all these lenders require proof of car ownership, income, and residency. You also need to provide a copy of your up-to-date auto insurance policy.
Many banks and credit unions also require a physical inspection of the vehicle. In this case, you need to bring your ride to their office so that they can gauge how much to lend you. If you go with an online lender, though, they’d likely ask you to send photos of your vehicle.
Car Title Loan
A title loan also lets you borrow money against your vehicle, provided it’s free or almost free of liens. An example of a lien is an outstanding car loan. If you still owe thousands of dollars on your auto loan, a lender is unlikely to grant you a title loan.
How Much Can You Borrow With a Car Title Loan?
If you qualify for a title loan, you can borrow around 25% to 50% of your car’s current value. So, if your ride is worth $20,000, a lender may grant you anywhere from $5,000 to $10,000.
One thing to note is that many states don’t allow title loans. Alaska, Florida, Iowa, Maine, and Wyoming are to name a few.
In other states where title loans are legal, there are usually caps on maximum title loan amounts. For example, in Mississippi, the law only allows title lenders to lend up to $2,500.
What Do You Need to Qualify for a Title Loan?
Vehicle ownership is the primary qualifying factor for title loans. That means your name should appear on the vehicle’s title and registration card.
If your ride is almost lien-free, you need to prove that you owe very little on your car loan.
In addition, most title lenders are non-bank and non-credit union businesses. Instead, they often operate with the designation of a title lender. However, some pawnbrokers may also offer title loans.
As for documentary requirements, they’re similar to those of auto equity loans.
If there’s any advantage to title lenders, it’s their credit score requirements. Many title lenders don’t need to carry out a credit check since the borrower’s car fully secures the loan. As such, they’re usually more lenient toward borrowers with poor credit scores.
So, if you’re part of the 30% of US consumers with a subprime credit score, you may still qualify for a title loan.
Non-repayment of auto equity and title loans can result in the seizure of your vehicle. The thing is, there’s a high risk of facing such a predicament, as these loans have high-interest rates. What’s more, you usually need to pay them back in full within about 30 days.
So, unless you’re 100% certain that you can pay back the loan on time, think several times before applying.
In the meantime, consider unsecured personal loans, which often have lower rates. In addition, according to this Plenti personal loan guide, such loans have terms of 6 months up to 7 years. This extended repayment period can make it easier to make your loan repayments on time and in full.
Another option is to borrow against a low-interest rate credit card with a cash line of credit. Of course, you’d still pay a cash advance fee, but it’s far lower than the rate charged by equity or title lenders. Moreover, you usually won’t incur interest fees on a cash advance unless you fail to pay it back in full on its due date.
Borrow Money Against Your Car Only During Emergencies
Keep in mind that while auto equity and title loans let you borrow money against your car, they can be costly. As such, it’s best to use them sparingly and only during emergencies. Better yet, explore your lower-cost alternatives first, such as a personal loan or a line of credit.
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