As you pay off your original auto loan, you develop what is called equity in it. Equity is simply the difference between the value of the item and how much you owe. So, if you’ve fully paid off your car, then you have 100 percent equity in your car.
If your vehicle is worth $10,000, and you’ve paid off $9,000 on your loan, then you have 90 percent equity. Equity is a very simple concept that can apply to anything you are working toward owning outright, including homes!
You can use the equity you have in your car to your benefit. Let’s explore a few ways.
Using Your Car’s Equity to Get a Title Loan
Did you know that when you own your car, you have access to fast cash?
An equity loan is money you borrow against the equity you have in your home — but there are two types of equity loans you can borrow based on your car’s equity: the first is car title loans. A car title loan allows you to use your car’s equity to get you cash, which you then repay as you would any other type of loan.
To be eligible for a car title loan, you must own the vehicle outright and prove it with a car title with your name on it. A car with a lien on the title, such as an auto loan, is not eligible for use for a car title loan.
Essentially, a title loan uses your vehicle as collateral so you can get the cash you need to pay for emergencies or surprise bills, instead of the lender using your credit score as a means to encourage loan repayment. This means even if you have bad credit or poor credit history, you could qualify to get a loan!
A car title loan is usually for about $100 to $1,000, but there are outliers, of course. The amount you’re eligible to borrow depends on the value of your car and your ability to repay the loan. If you’re getting a title loan on a Mercedes-Benz, you’re likely to qualify for more money than if you’re asking for one on an old Honda Accord.
Because car title loans are designed to be short-term loans, you will likely agree to pay it back quickly, if not with your next paycheck. Car title loan companies are known for working with their clients to develop an affordable payment plan and extending it as needed.
Ways Your Vehicle’s Equity Can Work To Your Advantage:
Take Out An Auto Equity Loan
At first glance, you might think an auto equity loan is the same thing as a car title loan, but they work differently! While they both don’t require a credit check, use your car as collateral, require the use of your car title as collateral, and have a similar application process, with an auto equity loan, you don’t have to own your car outright.
The major difference in applying for an auto equity loan versus a car title loan is that the lender will ask you for proof of the balance, that is, the amount of money left on your car loan. You still must be at least 18 years old and in possession of a current photo ID.
If you do not have your car title because you are still paying on your car loan, you should contact the lender you financed your car with to get a certified copy. Your title is always required, even for an auto equity loan, and your name must be on the document.
Just like with a car title loan, the amount of money you’re qualified to receive will depend on the car you’re borrowing money against, and your ability to repay the loan.
Again, a high-end luxury vehicle will likely qualify you for a much larger auto equity loan than your second-hand Hyundai Elantra. Similarly, if you take home only a meager paycheck, your loan may be less than someone who takes home several thousand dollars per month.
Trade-in Your Car For a New One
One of the most common ways to utilize equity in your vehicle is to trade your car in to purchase a new one. When you own your car outright, you can use its trade-in value as a down payment on a newer vehicle.
Car trade-ins are very common; twenty-three million trade-ins occur every year in the United States alone. People choose to trade in their vehicles rather than sell them for cash independently, generally due to convenience. Trading in means they don’t have to do the legwork to sell the car to an independent third-party, like marketing the vehicle for sale or spending their own money to have it detailed and parts like air filters replaced.
Refinance Your Auto Loan
Another way to take advantage of the equity in your car is to refinance your auto loan if you are still making payments on it.
It is likely that when you bought your car, the interest rates were very different than they are today — especially now that they’re at historic lows. Refinancing your loan with only the amount you owe remaining and getting a lower interest rate or repayment terms can save you thousands of dollars over the life of the loan.
While it isn’t wise to refinance when you only have a few months left on your loan, experts agree the best time to refinance is when:
You’ve worked to improve your credit score. Generally, the higher the credit score, the lower the interest rate.
You bought the car less than six months ago. If you know you can get a better loan rate, but you still have years left on your loan, go ahead and refinance to get the most bang for your buck.
You’re having issues with your lender. Maybe the system they use to submit payments is frustrating, or there’s some other reason. Refinancing to get a better lender can save you a headache.
You need a new loan term. Perhaps you realized you need a less expensive monthly car payment. In this case, lengthening your loan term can decrease the size of your monthly payment, and you can more easily afford to pay toward your loan. Most people don’t shorten their loan term unless they can get a lower interest rate because there usually aren’t penalties for paying off a loan early. You can simply send more money with each payment; check your loan agreement for details on any repayment penalties.
An Auto Equity Loan Gets You Fast Cash in Your Pocket
If you’re looking to get money quickly — physical cash in your hand — then a car title loan or auto equity loan are your best options for using your car’s equity. Refinancing your auto loan may save you money while you’re repaying on the car, and trading it in will get you your vehicle’s full trade-in value.
However, if you only need cash quickly to pay for a surprise expense or fund an important purchase, then a car title loan on a vehicle you own outright is one of your best available choices, especially if you fear you will be denied a personal loan due to having a low credit score. A vehicle equity loan is quite similar, except you do not need to have fully paid off your car to get one.
How will you choose to use the equity you have in your car to get the money you need?
