The past few years have been a wild ride for almost everyone, with just about every aspect of our lives transformed in ways big and small. This kind of chaos is hard enough when you’re short on cash, but when cash is tight, inflation is skyrocketingand an emergency suddenly presents a huge bill to pay, things can get dark.
If you don’t have a solid emergency fund to deal with an emergency, the most common solution is to borrow silver. Using credit cards to manage sudden debt is an easy solution, but these interest rates are often will make you regret the decision and any type of payday loan will have the same result. What you need is a collateral-based secured loan, like a home equity loan, but that won’t help you if you’re a tenant. And that’s where your car can come in: Just like a home equity loan, you may be able to get an auto equity loan, even if you are still owe money on the vehicle.
Here’s how auto equity loans work.
What is the difference between an auto ttitle loan and a car equity loan?
The first thing to understand is that there are two ways to borrow against your car: a car equity loan and a car title loan. You’ll want to avoid the latter like the plague, as it’s basically high interest payday loan who happens to put a lien on the title of your car. They tend to be very short term and easier to get, which is why people fall for them, but it’s a bad deal and if you fall behind on payments, you could lose your car.
A aThe equity loan, on the other hand, is usually offered by a traditional lender, such as your bank. This is a secured loan using your capital in the car as collateral, so the interest rates are reasonable and the payments will be clear and fixed.
How to calculate your equity in your car
The first step to getting a home equity auto loan is to figure out what you strength be able to borrow. It’s a pretty simple process:
- Determine how much you still owe on the car. If you paid off the loan (or bought it with cash in the first place), this number is obviously zero.
- Determine the current value of the car by checking with Kelley’s Blue Book Where Autotrader or another resource. (Prepare to be disappointed – cars lose value quick.)
- Subtract the first number from the second. It is both your capital in the car and the potential value of your mortgage. That’s not to say that’s what a bank or other lender will actually offer you – they’ll have their own bizarre calculations to determine how much risk they’re willing to take.
For example, if you have a 2018 Ford Taurus in excellent condition, her current estimated value is approximately $18,500. If you owe $5,000 on the loan, you could potentially borrow $13,500 of your principal. While some lenders will let you borrow 100% of your equity in the car, many won’t be willing to lend you that much, but this is a good place to start.
The process of getting an auto loan is similar to any other loan. You identify a lender that offers auto equity loans (not all lenders do this – most big banks don’t, so you’ll probably have to explore smaller local banks or online banks like Funding for seafarers), complete the application and complete any other steps required by the lender. The process tends to be quite quick as long as everything is in order. With online lenders, you can often get an approval – and the money – within a day, but researching the best rates can be worth a bit of delay if you have the time.
The wrong side
While a car loan is better than a payday loan and can be a great solution for a short-term cash flow crisis, there are some downsides to consider:
- Risk. You borrow money using your car to secure the loan, which means you could lose the car if you don’t repay the loan. This could be especially infuriating if you’ve paid off your car loan or are about to..
- Hidden costs. Some lenders charge extra fees because an auto equity loan is not common and is perceived as a higher risk than other loans, so be sure to read all the fine print. And since it’s expensive to be poor, lenders may require you to purchase comprehensive auto insurance to protect their assets, so you’ll end up with higher monthly payments on top of everything else.
The bottom line? If you need short-term cash and have plenty of equity in your car, an auto loan is a relatively stable way to cover the gap. But exploring other options first might make sense, and you should always keep the risks in mind.