What is an auto equity loan?
An auto equity loan is a type of secured loan that lets you borrow money using the equity in your vehicle as collateral. Equity is the difference between your car’s current market value and the amount you still owe on your auto loan, if any. If you own your car outright, your equity is equal to its full value.
Even though the vehicle serves as collateral, lenders usually still review your credit history and income before approving the loan.
Lenders determine how much you can borrow using a loan-to-value (LTV) ratio, which compares the loan amount to the vehicle’s appraised value. Your LTV ratio — and thus your eligibility — depends on your vehicle’s condition, how much equity you have and your ability to repay the loan.
How auto equity loan repayment works
After approval, the lender provides the funds and places a lien on your vehicle’s title. You then make regular monthly payments that include principal and interest. Repayment terms vary by lender but often range from a few months to several years.
Once the loan is fully paid off, the lender releases the lien on your vehicle. In most cases, this title or lien release occurs within about seven to 14 days, restoring full ownership of the vehicle to you.
Risks of using your car as collateral
First and foremost, your car will need to have enough value to cover the loan amount you need. “If the loan amount you need is more than the value of your car, you may need to find additional collateral or reconsider the loan amount,” said Sherman Standberry, a certified public accountant.
Because the loan is secured by your vehicle, falling behind on payments can have serious consequences. If you default, the lender may start the repossession process, meaning your car can be taken and sold to recover the remaining loan balance.
If the loan amount you need is more than the value of your car, you may need to find additional collateral or reconsider the loan amount.”
If the vehicle sells for less than what you still owe, you may also be responsible for paying the deficiency balance, which is the remaining debt after the sale of the car.
Auto equity loan example
Alice owns her car outright, and its current market value sits at $20,000. Alice’s credit only sits at 510, which isn’t high enough to qualify her for a personal loan she needs to replace her home’s roof.
Alice can use that $20,000 worth of equity to put up as collateral on a loan of the same amount (or higher, depending on the lender). Since Alice is willing to take on the risk of covering the loan with her car if she stops making payments, lenders can forgive her lower credit score, which indicates she’s a risky borrower.
» LEARN MORE: How to Get a Personal Loan With Bad Credit
How to apply for an auto equity loan
Applying for an auto equity loan is usually quick, but lenders still verify your vehicle’s value and your ability to repay the loan. The process can take anywhere from the same day to about a week, depending on how quickly the vehicle appraisal and paperwork are completed.
- Check your equity: Estimate your car’s value and subtract any remaining loan balance.
- Vehicle appraisal: The lender confirms the car’s value through photos, databases or an inspection (typically one to seven days).
- Gather documents: Most lenders require ID, proof of income, proof of insurance and the vehicle title or payoff information.
- Compare offers: Many lenders offer same-day preapproval so you can review rates and terms.
- Sign the agreement: The lender places a lien on the vehicle title once the contract is finalized.
- Receive funding: Funds are typically deposited within one day to one week.
Lenders also review underwriting factors such as your debt-to-income (DTI) ratio, employment stability and credit history. Vehicles must usually meet basic requirements, including age limits, mileage caps and acceptable mechanical condition.
Pros and cons of an auto equity loan
Using your car as collateral can make it easier to qualify for a loan and may lead to lower rates. But if you miss payments, you could face high rates or even have your vehicle repossessed.
Tracy, a ConsumerAffairs reviewer from Texas, shared a cautionary experience: “Although they did approve our title loan in our time of need, we definitely paid the price. The interest rate was outrageous. We put our Durango title as collateral on the loan. The payback was more than double our loan amount.”
Pros
- Better interest rates compared to unsecured loans
- Potentially higher loan amounts with enough vehicle equity
- Quicker approval process since the loan is secured
Cons
- Risk of repossession if you miss payments
- Potential to borrow more than your car’s value
- High rates are still possible with poor credit
Where can I get an auto equity loan?
Auto equity loans are offered through a variety of lender types. Big banks offer these loans, as do some credit unions. Credit unions focus on community-based lending and are often more flexible, but larger banks often offer more options.
Additionally, there’s a growing number of online-only lenders offering personal loans secured by your car’s equity. Upgrade, for example, offers secured personal loans up to $50,000. Online lenders like Upgrade differ from more traditional options in their funding speed. Online lenders focus on next-day funding or funding you can get in just a few days.
To apply through any of these lenders, you need to have the right documentation, including:
- Your vehicle’s information, such as the vehicle identification number (VIN), title and registration
- Insurance documents that prove you have auto insurance
- Your driver’s license
- Proof of income in the form of pay stubs or bank statements
- Vehicle inspection records
- An appraisal verification that shows the current market value of your vehicle
» COMPARE: Best Secured Personal Loans
Is an auto equity loan right for you?
Before using your car as collateral, consider whether the benefits outweigh the risks. Because the loan is secured by your vehicle, missing payments could lead to repossession. Key factors to evaluate include:
- Equity: More vehicle equity can improve approval odds and loan terms.
- Monthly budget: A common guideline is the “15% rule,” meaning loan payments should stay below about 15% of your take-home pay.
- Credit alternatives: Personal loans or credit cards may provide funding without putting your car at risk.
- Vehicle importance: Losing a car you rely on for work or daily life could create serious problems.
- Other financing options: Home equity loans, payment plans or assistance programs may be safer alternatives.
- Interest and fees: Secured loans can still carry high rates, especially for borrowers with poor credit.
An auto equity loan may work best if you have significant equity in a vehicle you don’t rely on heavily. It may be riskier if your budget is tight or the car is essential for your daily transportation or income.
Auto equity loan alternatives
If an auto equity loan isn’t a good choice for you, consider these options.
Traditional bank loans
Certain banks do accept low-credit borrowers. While you’ll likely need to settle for higher interest rates, you won’t need to put anything up as collateral to qualify.
Credit unions are more willing to work with low-credit borrowers, especially if you’ve been a customer for years. You’re working with employees who are members of your community and understand where you’re at.
Cash-out auto refinance
Cash-out auto refinancing lets you access your vehicle’s equity by replacing your current auto loan with a new, larger loan. Instead of taking out a separate loan against your car, the lender pays off your existing loan and issues a new one based on the vehicle’s value.
The difference between your old loan balance and the new loan amount is paid to you in cash. For example, if you owe $10,000 on your car and refinance into a $14,000 loan, you could receive about $4,000 after the original loan is paid off.
Because refinancing replaces the original loan, you’ll have one monthly payment instead of two. However, extending your loan term could increase the total interest you pay, and the vehicle still serves as collateral if you fall behind on payments.
Home equity loans
Rather than pulling equity from your car, home equity loans allow you to use the equity from your home to secure a loan.
Home equity loans are much larger loans than secured personal loans, but just like auto equity loans, if you miss payments, your lender could seize your home to pay off your debt.
Car title loans
A car title loan is similar to an auto equity loan in that your car is being used as collateral. However, with a car title loan, your car’s title gets transferred to the lender until you repay the loan.
These loans should be a last resort and are even illegal in some states. They don’t come with the best terms because they’re quick-turnaround loans that rely on your car’s title as collateral rather than your credit score.
FAQ
What can be used as collateral for a personal loan?
The type of items you can use as collateral varies from lender to lender, but generally, anything you have equity in, you can use. This includes vehicles, homes, boats and even financial assets like investments.
What is the danger of putting up collateral for a loan?
The main danger in putting up any sort of collateral for a loan comes if you can’t continuously make on-time payments. If you start missing payments on your loan, your lender may repossess your collateral and sell it to pay the rest of your debt. This can leave you without a car or other major asset, such as your home.
Can I use my car as collateral for a loan if I still owe on it?
Surprisingly, yes, you can. As long as you have equity in your vehicle, it qualifies as collateral. This does mean that your car needs to be worth more than what you owe on it.
How much can I borrow if my car’s equity is limited?
If your car’s equity is limited, the amount you can borrow will generally be restricted to a percentage of the equity you have. Most lenders cap loans at 70% to 85% of your car’s appraised value.
For example, if your car is worth $10,000 and you owe $5,000 on it, you have $5,000 in equity, meaning you might qualify for a loan of $3,500 to $4,250. Some lenders may offer more depending on your overall financial profile, but expect tighter limits with low equity.
What happens if I default or miss payments on my loan?
Defaulting or missing payments on an auto equity loan can have serious consequences. The lender has the right to repossess your car to recover the remaining loan balance. Once repossessed, the car may be sold, and if the sale doesn’t cover the full loan amount, you may still owe the difference. In addition to losing your vehicle, your credit score can take a significant hit, which will impact your ability to borrow in the future.
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Capital One, “What is collateral? Definition, examples and more.” Accessed March 16, 2026.
- Navy Federal Credit Union, "Car Title Loans: What You Need to Know." Accessed March 17, 2026.
- Debt.org, "Secured Loans." Accessed March 17, 2026.
