Emergencies happen when you least expect it, and sometimes you aren’t prepared. You need cash now but don’t know where to get it. You find yourself in a tough situation with bad credit and unable to qualify for a personal loan. What other options exist? While doing research you stumble upon auto equity loans. Continue reading to understand auto equity loans and how they work.
What Is An Auto Equity Loan and How Does it Work?
There are two types of loans, secured and unsecured. An auto equity loan is a secured loan similar to that of a home equity loan. The difference is that you’ll being borrowing money based on the value of your vehicle and will be used as collateral instead of your house. As with all loans, you’ll pay back the loan amount with interest until the end of the repayment term. In order to get your loan amount, the lender will assess the value of your vehicle. Lenders will evaluate how much equity is in your car, what the fair market value is, your income, and your credit score.
To qualify for an auto equity loan, you’ll need to fill out an application and provide details about your vehicle's value and the equity you have in it. Here’s a list of information you must also provide in order to be qualified:
- Vehicle registered under your name
- Loan documentation
- Proof of identity
- Proof of employment and income
- Comprehension and collision auto insurance coverage
If you’re approved for the loan application, the loan amount can be deposited to your account as early as the same day. Processing time for the loan will depend on the lender so make sure all the information you need is disclosed. The term of your loan can range from twelve months to years depending on the terms of the lender.
Benefits of Auto Equity Loans
Auto equity loans come with benefits and can be used to your advantage. Here’s a few benefits to keep in mind to help make your decision:
- Fast Cash - If all requirements are met, some lenders will approve the decision in minutes. Getting fast cash is crucial during emergencies.
- Less Documents - When applying for an auto equity loan, the lender does not require the car title of your vehicle. Depending on your situation, you may have paid off your car or still making payments.
- Easier to Qualify - Most of the time it’s easier to qualify for auto equity loans since your vehicle acts as collateral.
- Loan Term - If you need more time to pay off your loan, you can request to extend the loan term.
Risks of Auto Equity Loans
Although there are many benefits, there’s a downside to auto equity loans as well. Here’s a few drawbacks to keep in mind:
- Risk of Repossession - Since your car is collateral for the loan, you risk the chance of repossession. Missing payments or not paying off the loan will results in repossession of your vehicle. In addition, your credit score will be affected when the lender reports any missed payments or repossession of the vehicle.
- Fees - Auto equity loans can get expensive. Fees may or may not be involved depending on your situation. Some auto equity loans can come with documentary stamp fees and DMV fees. As discussed earlier, you can request to extend the term of your loan but you’ll have to pay a fee. You can rack up fees with multiple extension requests.
Alternatives
If you’re unsure about auto equity loans, there are other alternatives that can help you during an emergency. Consider these options to see what best fits your needs:
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Personal Loan - Personal loans are categorized as unsecured loans and do not require collateral. The most important difference to understand is that you won’t risk repossession of your vehicle. If you aren’t confident you can make payments monthly or complete all payments, this might be a better option.
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Seeking Help From Family - Reaching out to family members can be a great alternative if they are willing and able. Depending on terms and expectations, borrowing from a family member may not require interest. This can be a sensitive topic of conversation but can be great alternative during an emergency.
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Apply For a Credit Card - Although this might not be the best option if you already have debt, applying for a credit card can help you in an emergency. Many banks and credit unions offer credit cards with 0% APR which can be beneficial in many ways.
Resources:
1. https://www.supermoney.com/auto-equity-loans-everything-need-know/
2. https://www.creditkarma.com/personal-loans/i/auto-equity-loan/
