An auto equity loan is any loan made using the equity in the vehicle as collateral. It is similar in concept to a home equity loan, only the interest rate is and length are usually much different.
Auto equity loans are available in many states, both where title loans are and are not permitted. If you live in a state that does not permit title loans it may be possible to get an auto equity loan. Auto equity loans can be for both new and used cars.
New Car Equity Loans
Purchasing a new car often involves financing the car. This is not required, although given the price of new cars not many people can afford that large of a purchase without financing.
When a new car is financed, it is done so as a secured loan. This means the lender puts a lien on the vehicle and has a security interest in the vehicle until the loan is paid off. In other words the equity in the vehicle is collateral for the loan.
Used Car Equity Loans at Purchase
When you purchase a used car from a dealer you typically have a choice to pay in full or to finance the purchase. Because of the cost of many buyers choose to finance this purchase.
When you finance the purchase the loan is what is considered a secured loan. This means the equity in the vehicle secures the lender’s interest in the loan. The lender puts a lien on the vehicle and issues a loan with certain terms that you both agree to.
This is one form of an auto equity loan; meaning you are borrowing money using the equity in the vehicle as collateral. The loan term start at the vehicle purchase date.
Used Car Equity Loans After Purchase
In some cases vehicles are purchased with cash, or are paid off while they still have a significant amount of equity. You can also get an auto equity loan on a used vehicle that has enough equity to lend against. The terms will be different than if you were purchasing the vehicle, but the idea is the same. It is a loan secured by the equity in the vehicle.
What is the Difference Between a Title Loan and an Auto Equity Loan?
A car title loan is a specific type of loan that each state regulates at the state level. Historically, many title loans had very short terms (30 days) with very high rates. They were similar to Payday loans in this way.
Over time some states have extended the length of time borrowers have to repay title loans and put caps on the interest rate lenders were permitted to charge. This made title loans more affordable in certain states.
Additionally in some states they can last over a year. The fact is a title loan is simply a form of auto equity loan. A form with specific terms and conditions required by the state.
Types of Title Loans
There are two main types of title loans. Both are secured by the vehicle. The first type has one single payment. The second type has monthly installments.
Single Payment Title Loans
Single payment title loans are usually due in full within 30 days from the loan initiation. This means the entire loan amount, plus interest and fees, is due fairly quickly from the loan date. These loans can be difficult to repay, especially if the amount borrowed is significant. Always make sure you can afford to repay the loan in full by the due date.
In many cases you can roll over a single payment title loan. This is not recommended as costs can get excessive in a short period of time. Learn why title loan roll overs are not a great idea.
Monthly Installment Title Loans
The second type of title loan is one with monthly installments. These loans are usually amortized over a period of months. You can use the title loan calculator to get an idea of what these payments look like.
The borrower makes monthly payments for the loan term until they pay off the loan. In this way they are similar to other car loans. You can also make early and extra payments to help pay the loan off faster. To get an idea of what monthly installment title loans cost you can use the car title loan estimate calculator to get an estimate.
An auto equity loan is really just a term for a loan secured by the equity in the vehicle used for the loan. This can include:
- Used Car Loans
- New Car Loans
- Car Title Loans
The loan is a secured loan and lender places a lien on the vehicle until the loan is completely paid off. This means the lender can repossess the vehicle should the borrower default on the loan. As with any loan, never borrow more than you can afford to repay.