Car equity loans are secured loans that use your car as collateral, usually with flexible eligibility requirements. While they typically come with longer terms than other bad-credit options, they can come with high rates and fees. And if you can’t pay off your auto equity loan on time, you could lose your car.
What is a car equity loan?
A car equity loan is a type of secured loan geared to bad-credit borrowers that uses your car as collateral. It’s similar to a home equity loan in that you don’t always need to fully own your car to qualify. However, auto equity loans are typically more expensive and meant for emergency situations.
How much you can borrow is based on two main factors: the amount of equity you own in your car and its fair market value. So if you have a car with a fair market value of $10,000 and you’ve paid off 80% of your car loan, you can borrow up to $8,000.
Can I qualify for a car equity loan?
The good news is that car equity loans often accept bad credit borrowers, so you can consider applying even if your credit isn’t in great shape. Besides having lenient credit score thresholds, auto equity loan lenders generally also require you to:
Have a car registered in your name. It must be in your name if you want to borrow against it, even if you’re still paying it off.
Provide proof of income. Typically lenders ask to see your two most recent pay stubs as proof.
Have comprehensive and collision car insurance. Many car equity loan providers require you to sign up for comprehensive and collision insurance for the length of your loan term.
Some online lenders might not require you to have a bank account to get a car equity loan, but many do. If you’re looking for a loan and don’t have a chequing account, reach out to your lender to make sure you’re eligible before you apply.
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Where can I find car equity loans in Canada?
Thinking of getting a car equity loan? You might want to start by looking in one of these places first.
Online direct lenders
Online lenders tend to be the fastest and most streamlined option for car equity loans. They offer convenient quick online applications and typically fast loan approval and turnaround times. However, not all online lenders can lend in all provinces and territories, so check that you’re eligible before you apply.
Online loan brokers
There are several online loan broker platforms, like Loans Canada or LoanConnect, where you can fill out one application and get matched with multiple car equity loan options. These platforms are free to use and can help you conveniently compare loan features from all of your loan options to ensure you’re getting the right loan terms for your needs.
How much does a car equity loan cost?
Car equity loans aren’t always cheap, though the costs vary depending on your lender. You’ll typically find car equity loan rates as low as 9% APR or as high as 49%.
Let’s say you get approved for a $5,000 car equity loan at an interest rate of 25% with a 3 year loan term. In that case, your monthly payment would be $198.80 and you would pay a total of $2,156.77 in interest by the end of your loan.
Car equity loan monthly payment calculator
Calculate your monthly payments on an auto equity loan
Enter how much you plan to borrow under Loan amount.
Write the loan term in years (not months) under Loan terms.
Enter the loan’s interest rate if there are no fees under Interest rate. Otherwise, write the annual percentage rate (APR), which includes interest and fees.
Hit Calculate.
Review your results.
Should I get credit insurance?
A lender might offer credit insurance when you apply for a car equity loan. This covers your car loan payments if your car gets damaged, or if you face an unexpected financial hardship like loss of income or medical bills. It doesn’t cover the cost of repaying your car and can be expensive.
Auto equity vs. auto title loans
Auto equity loans and auto title loans are very similar. So similar, in fact, that some lenders use them interchangeably. Both are quick financing solutions that allow you to borrow against the value of your car. You don’t need to have good credit to qualify for either, and your lender can repossess your car if you’re unable to make payments.
But there is one main difference. To get an auto title loan, you need to fully own your car and not have any liens on it. For a car equity loan, that’s not always the case.
Advantages and disadvantages of car equity loans
Not sure if a car equity loan is right for you? Weigh the pros and cons to help you decide.
Advantages
It’s easy to qualify. Most car equity loan providers accept poor-credit borrowers since you’re putting up collateral.
You don’t need to fully own your car. You can still get a car equity loan even if you haven’t fully paid off your car loan.
Longer loan terms than other bad-credit options. Longer terms can give you more affordable repayments than you’d have with a short-term loan, making it less of a risk that you’ll default. However, you’ll pay more in interest in the long run.
Disadvantages
You could lose your car. If you rely on your car to get to work or school on a regular basis, taking out a car equity loan might not be worth the risk if you’re not able to make your payments.
It can be expensive. With the possibility for high APRs and long loan terms, car equity loans can become a very expensive loan option.
Should I consider refinancing?
If you already have a title loan that you’re struggling to pay off, you might want to refinance it instead. Refinancing involves taking out a new loan to pay off your current loan, ideally with more favorable rates and terms.
But even if you’re unable to qualify for more competitive rates, refinancing could help lengthen your loan to make repayments more affordable.
How do I apply for a car equity loan?
To apply for car equity loans, you’ll need to follow these steps:
Calculate the equity in your car by first estimating how much your car is worth. You can do that by using car value calculators on sites like Canadian Black Book and AutoTrader.ca. Once you know how much your car is worth, subtract how much you have left to pay on your car loan from that value. That difference is the equity you have in your car.
Shop around for car equity loans so you can compare loan rates and terms to make sure you’re getting a competitive offer. Check out direct lenders or compare multiple options at once through a free broker like Loans Canada or LoanConnect.
Apply for a car equity loan once you’ve decided on a lender. Gather required documents, which may include those proving you own the car, documents showing the amount left to pay on your car loan, proof of insurance and any personal financial statements. Then apply for the auto equity loan using the lenders online application portal.
Alternatives to car equity loans
Getting a car equity loan might not be right for you so here are some other options to consider:
Auto title loans
If you need money fast and fully own your car, you might want to consider a car title loan. With a title loan, you’ll have more choices to compare — though it’ll still be risky and expensive.
Credit card cash advance
A credit card cash advance can potentially be cheaper than a car equity loan because the interest charge is usually capped at around 23%, which is less than the maximum interest charge of 49% for car equity loans.
Local resources
If you have a low income and need funds to cover basic expenses, you could qualify for benefits offered by your province, region or city. These can reduce your monthly costs and help you save up for the expense you wanted to fund with your car equity loan.
Bottom line
When you’re still paying off a car loan and have bad credit, a car equity loan could be a quick way to get cash for an emergency expense. But it’s not without risk. You could lose your car and damage your credit if you’re unable to pay it off. Before you sign up, check out your other short-term loan options first.
Frequently asked questions about car equity loans
Your car has equity if it is entirely paid off or if the appraised value of your car is worth more than the amount you have left to pay off on your car loan.
Negative equity on a car loan is when you owe more on your car than it's worth. You can't qualify for a car equity loan if your vehicle has negative equity. Negative equity on a loan is commonly called an upside-down loan.
You can. But you'll need to continue paying off your car loan if your loan is worth more than the value of your car.
Yes. Many car equity loan providers allow you to put your car up for collateral even if it's not paid off.
Anna Serio is a lead editor at Finder, specializing in consumer and business financing. A trusted lending expert and former certified commercial loan officer, Anna's written and edited more than 1,000 articles on Finder to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in publications like Business Insider, CNBC and Nasdaq, and has appeared on NBC and KADN. Anna holds an MA in Middle Eastern studies from the American University of Beirut and a BA in Creative Writing from Macaulay Honors College at Hunter College, CUNY.
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