How to Use an Auto Loan When You Need Money
The last few years have been one wild ride for most everyone, with almost every aspect of our lives changed in a big way or a little way. This kind of chaos is hard enough when you have plenty of cash, but when money gets tight, inflation skyrockets, and an emergency suddenly presents you with a huge bill, things can get bleak.
If you don’t have a reliable emergency fund to help you in an emergency, the most common solution is to borrow money. Using credit cards to pay off sudden debts is an easy solution, but these interest rates will often make you regret this decision – and any kind of payday loan will have the same result. What you need is a secured loan based on collateral, such as a home loan, but this will not help if you are renting. And this is where your car can come in handy: just like with a home loan, you can get a car loan even if you still owe money for the car .
This is how car loans work.
What is the difference between a car loan and a car loan?
The first thing to understand is that there are two ways to get a loan against your car: a car loan and a car loan. You should avoid the latter like the plague, as it is essentially a high-interest payday loan that puts a lien on the title to your car. They tend to be very short term and easier to get, which is why people fall in love with them, but they are a bad deal and if you delay payments you could lose your car.
On the other hand, a car loan is usually offered by a traditional lender such as your bank. This is a secured loan using your equity in the car as collateral, so interest rates are reasonable and payments are clear and fixed.
How to calculate your equity in your car
The first step to getting a car loan is to find out what you can borrow. It’s a pretty simple process:
- Determine how much you still owe for the car. If you paid off the loan (or even bought it with cash), this number is obviously zero.
- Determine the current value of a car by consulting the Kelley Blue Book , Autotrader , or other resource. (Prepare to be disappointed—cars depreciate quickly .)
- Subtract the first number from the second. This is both your equity in the car and the potential value of your car loan. That doesn’t mean that’s what the bank or other lender will actually offer you – they’ll have their own weird math to figure out how much risk they’re willing to take.
For example, if you own a 2018 Ford Taurus in mint condition, its current appraised value is around $18,500. If you owe $5,000 on a loan, you could potentially borrow $13,500 from your home equity. While some lenders will let you borrow 100 percent of your equity in a car, many won’t want to lend you that much, but this is a good starting point.
The procedure for obtaining a car loan is similar to any other loan. You identify a lender that offers auto loans (not all lenders – most big banks don’t, so you’ll probably have to look into smaller local banks or online banks like Mariner Finance ), fill out an application, and work your way through it. any other steps requested by the lender. The process is usually pretty fast as long as everything is in order. With online lenders, you can often get approval—and money—within one day, but finding the best rates can be worth the slight delay if you have the time.
back side
While a car loan is better than a payday loan and can be a great solution for short-term cash shortages, there are some downsides to consider:
- Risk. You borrow money using your car to secure a loan, which means you could lose your car if you don’t repay the loan. This can be especially frustrating if you paid off your car loan or were close to it.
- Hidden costs. Some lenders charge extra fees because car loans are not common and are considered riskier than other loans, so be sure to read everything in the fine print. And because being poor is expensive, lenders may require you to have comprehensive auto insurance to protect your assets, so you get higher monthly payments on top of everything else.
bottom line? If you have a short-term need for cash and have a lot of equity in your car, a car loan is a relatively stable way to cover the shortfall. But it may make sense to explore other options first, and you should always be aware of the risks.