What is an auto equity loan? | Smart change: personal finance

Lindsay VanSomeren – Forbes Councilor

Although auto equity loans are not very common, they allow you to borrow against the equity in your car. Your equity is the difference between your car loan balance and the current value of your car. If you have equity in your car and need to borrow money, this might be an option worth pursuing.

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We’ll walk you through how auto equity loans work to help you decide if this type of personal loan is made for you.

How Auto Equity Loans Work

When you take out an auto equity loan, your lender offers you a loan based on your car equity. If you have paid off your car loan and owe it for free, your equity would be equal to the current market value of the car. However, if you still owe money on your loan, your equity would equal the current value of the car minus your loan balance.

For example, if the car is worth $ 20,000 and you owe $ 5,000 on it, you have $ 15,000 in equity ($ 20,000 – $ 5,000).

However, each lender sets their own rules for the maximum amount you can borrow. Some will allow you to borrow all of your equity (like the $ 15,000 in the previous example) while others offer loans up to 125% of your equity, which would equal $ 18,750 in this case ($ 15,000 x 125%)