Everything You Need to Know About Car Equity Loans in Canada

If you’re like most Canadians, you likely have a car that’s important to you. You use it to get around town, run errands, and take care of your family. What would you do if something happened to your car and you needed money to fix it? 

You might consider taking out a car equity loan. Read on to find out what car equity loans are, how they work, and who is eligible for them.

Let’s dive in!

What Are Car Equity Loans?

A car equity loan is a type of secured loan that uses your car as collateral. This means that if you don’t make your payments, the lender can repossess your car. Car equity loans are also sometimes called auto title loans or pink slip loans.

Car equity loans are very similar to home equity loans. However, in this case, fully owning your car is not necessary. So, if you’re already using your car as collateral for other lenders, you’ll still be eligible for an auto equity loan.

People who need money fast and have bad credit will benefit the most from an auto equity loan. They’re also a good option if you don’t have time to wait for a traditional loan to be approved.

Because car equity loans are secured by your car, they’re not ideal if you can’t afford to make your payments. If you default on your loan, the lender can repossess your car.

So, if you’re considering a car equity loan, make sure you understand the risks and are confident you can make your payments on time.

How Do Car Equity Loans Work?

Car equity loans are short-term loans, which means they’re meant to be paid back within a few months. The amount of money you can borrow against your car is based on its fair market value. The lender will appraise your car to determine its value, and then they’ll offer you a loan for a percentage of that value.

Even so, keep in mind that the lender will also charge interest on the loan. This means you might end up repaying more than the original amount you borrowed.

car equity loans

Where Can You Get a Car Equity Loan?

You can get car collateral loans from a bank, credit union, or online lender. But, the process for getting a loan will vary depending on the lender you choose.

For example, some lenders might require you to fill out an online application and provide proof of income, while others will require you to go and sign loan documents in person. Keep in mind that although the online process is faster, it can be pricier than applying for a loan at a credit union or a bank.

When you’re shopping for a car equity loan, it’s important to compare offers from multiple lenders to find the best deal. Make sure you understand the terms and conditions of each loan before you apply.

Qualification Requirements

Luckily, having a good credit score is not necessary for a car equity loan. However, you’ll need to check a few other marks. The requirements for car equity loans vary by lender, but there are some general qualifications you’ll need to meet.

Present proof of income: You’ll need to provide the lender with proof that you have a steady income. This could be in the form of payslips, tax returns, or bank statements.

Have your car registered in your name: The car you’re using as collateral must be registered in your name.

Provide proof of insurance: You’ll need to have comprehensive and collision insurance for the lender to consider your loan application.

You don’t need to own your car outright to qualify for an auto equity loan. However, having a higher equity stake in the vehicle will increase your chances of getting approved for a loan.

Credit Score Requirements

As mentioned before, having a good credit score is not necessary for an auto equity loan. In fact, people with bad credit often turn to car equity loans because they can’t get approved for a traditional loan.

Your credit score and report aren’t your lender’s main priority since they use your car as collateral to secure the loan. If you fail to pay out your loan, the lender will repossess your car and sell it in order to pay for the loan.

Nevertheless, bear in mind that although your credit score isn’t a factor in getting approved for a car equity loan, it will affect the interest rate you’re offered. So, if you have a good credit score, you might be able to get a lower interest rate on your loan.

How Much Does A Car Equity Loan Cost?

The cost of a car equity loan will mainly depend on the lender you choose. For instance, you can expect an APR of up to 36% when applying at a local bank or credit union, whereas online lenders can charge up to 500% APR.

Aside from interest, taking out a loan against your car in Canada some additional fees:

Extension fees: If you can’t repay your loan on time, some lenders will offer an extension. However, this will come with an extra fee that varies by lender.

DMV lien fee: When you borrow money against your car, you’re adding a lien to your car’s title. The DMV will charge you a fee that depends on your county, but the DMV lien fee is usually around $28 to $33.

Documentary stamp tax: Depending on your location and the value of your vehicle, you can possibly be charged with a documentary stamp tax when you add a lien to your car’s title.

When you apply for a car equity loan, some lenders may provide credit insurance. This protects your car loan payments if your vehicle is damaged or if you experience a sudden financial issue such as medical bills or unexpected unemployment. Still, credit insurance can be costly and it won’t cover repaying your car.

Benefits and Drawbacks of a Car Equity Loan

Before you take out a car equity loan, it’s important to be aware of both the benefits and drawbacks of this type of loan:

Benefits:

– You can use your car as collateral to get a loan without having good credit.

– The application process is fast and easy.

Car equity loans are available even if you’re currently in bankruptcy.

– The interest rate on your loan will be lower than other types of loans such as payday loans.

Drawbacks:

– You could lose your car if you can’t repay the loan.

Car equity loans have high interest rates, so you might end up paying more in the long run.

– You might be charged additional fees such as extension fees, DMV lien fees, or documentary stamp taxes.

– Some lenders might require you to purchase credit insurance, which can be costly and doesn’t cover repaying your loan.

If you’re considering taking out a car equity loan, make sure you weigh the pros and cons carefully to ensure that it’s the right decision for you.

Alternatives to Car Equity Loans

If you’re not sure if a car equity loan is right for you, there are a few other options to consider:

Personal loans: You can apply for a personal loan from a bank, credit union, or online lender. Personal loans usually have lower interest rates than car equity loans, but you’ll need good credit to qualify.

Check out the best personal loan companies in Canada in 2022!

Car title loans: A title loan is similar to a car equity loan in that you use your car as collateral. However, with a title loan, you actually hand over your car title to the lender until you repay the loan. This means that if you can’t repay the loan, the lender can repossess your car.

Borrowing from a friend or family member: If you have a close relationship with someone who’s willing to lend you money, this could be a good option. Just make sure to draw up an agreement so that there’s no misunderstanding about the loan.

Auto loan refinance: If you have a current auto equity loan, you might be able to refinance the loan at a lower interest rate. This could save you money in the long run, but it will likely require good credit.

Bill extensions: If you’re having trouble paying a bill, you can sometimes contact the company and ask for an extension. This won’t cost you anything, but it might negatively impact your credit score.

Cash-out refinancing: If you have equity in your car, you might be able to refinance your car loan and get cashback. However, this will likely only be an option if you have good credit.

Credit cards: You can use a credit card to pay for expenses, but this will likely have a high interest rate.

Home equity loans: If you own a home, you might be able to take out a home equity loan or get a line of credit. However, this option comes with the risk of losing your home if you can’t repay the loan.

There are plenty of different options to consider if you need money and are thinking about taking out a car equity loan. Be sure to do your research and decide what’s best for you.

Conclusion

Car equity loans are a great way to get the money you need when you need it. They are quick, easy to qualify for, and can be used for a variety of purposes.

 If you’re considering a car equity loan, be sure to do your research and compare offers from different lenders to get the best rate and terms. With a little planning, you can use a car equity loan to your advantage and get the money you need when you need it.

FAQ

Can you borrow from the equity in your car?

Yes, you can borrow from the equity in your car. With a car equity loan, you use your car as collateral to secure the loan. This means that if you can’t repay the loan, the lender could repossess your car.

How does equity work on a car loan?

When you take out a car loan, the lender will give you a loan for the purchase price of the car minus any down payment that you make. The difference between the loan amount and the purchase price is your equity.

How much negative equity will a bank finance on a car?

Most banks will finance up to 100% of the purchase price of a car. This means that if you have negative equity in your car, you’ll still be able to get a loan. However, you may have to pay a higher interest rate.

What is the minimum credit score for a car equity loan?

There is no minimum credit score for car equity loans. However, your interest rate will be based on your credit score. The higher your credit score, the lower your interest rate will be.

ABOUT AUTHOR

When Angela combined her deep-seated love for linguistics with her growing interest for finance and money management, she struck a gold mine. She’s scoured the internet far and wide for all things related to money and finances, including payments, budgeting and investing. Now she’s eager to share her knowledge and skills with the world, determined to make it a better place. In her free time, she loves to read a good book.

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