Does an Auto Equity Loan Hurt Your Credit?

If you’re in a financial pinch and don’t think you’re eligible for other financing, an auto equity loan might be what you need to see you through. Such loans allow you to borrow against your vehicle’s value. If you’re wondering how an auto equity loan would work, here’s that – and more. 

What is an Auto Equity Loan?

Similar to home equity loans, auto equity loans use your vehicle’s value for a short-term loan. Because the car serves as collateral, such a loan is generally easier to get than a traditional personal loan. However, this also means you could lose your vehicle if you don’t make timely payments.

With this type of secured loan, you can often borrow money whether or not you own the vehicle outright. If you have not already paid off the vehicle, a loan means adding to the amount already owed.

How much you can borrow will hinge on your vehicle’s fair market value, the amount of equity you have in your vehicle, your income and credit history.

In addition to interest costs, some auto equity loans call for Department of Motor Vehicles lien fees and documentary stamp tax fees. Such fees should be reflected in your annual percentage rate.

Where Can I Get Such a Loan?

While many of the nation’s largest banks do not offer auto equity loans, the loans are available from credit unions and some online lenders. When shopping around for a loan, remember that 36 percent is upwards of what’s generally considered an affordable interest rate, according to the National Consumer Law Center.

Applying for an Auto Equity Loan

When you apply for a loan, the lender will usually determine your vehicle’s worth and the amount of equity you have. It will also likely make sure the car is registered in your name. You will need to provide proof of income as well as comprehensive and collision insurance.

Can an Auto Equity Loan Hurt My Credit?

It can – if you do not make payments as agreed. In that case, the lender will report the missed payments to the credit bureaus. If your vehicle is repossessed, that will be reported as well. In either case, your credit will be negatively affected.

Vehicle Title Loans: An Alternative 

If you’re experiencing a financial emergency, a vehicle title loan is another option. These are short-term loans, usually for 30 days or less, that are issued by title lenders.

Such a loan requires ownership of a car with an unencumbered title, which is used to secure the loan. Borrowers may keep their car while they’re making payments; the lender will simply keep the title until the loan is paid off. As with auto equity loans, you could lose your vehicle if you miss payments.

The amount you can borrow will depend on the vehicle’s make, model, age, mileage, and overall condition, and on any alterations or modifications. You’ll need to supply recent photos of the vehicle in natural light from all angles.

Your offer will also depend on your loan repayment ability. You’ll have to show proof (paystubs, bank statements, etc.) in that regard. If you’re not employed but have income from Social Security, Worker’s Compensation, a rental property, or self-employment, for example, that’s usually acceptable as well.

Title Loans and Credit

Note that while the title lender might run your credit, you can still get a loan if you meet the other requirements. Poor credit does not automatically rule you out for a title loan. 

Unlike with auto equity loans, though, title loan companies generally do not report to the credit bureaus. However, after your loan is paid off, some title companies will make a favorable report to the credit agencies. So, a title loan could actually help your credit.

Both auto equity loans and title loans can help during a financial emergency. However, while auto equity loans can potentially hurt your credit, a title loan may be able to improve it.