Car equity loans have been a lifesaver to Canadians, allowing them to take out loans using their cars and pay them back in installments.
Statistics from Newswire show that about 83% of Canadians own a car, while Canada.ca reports that about 28% of Canadians have applied for car equity loans in the past decade.
In this article, you’ll learn important facts about car equity loans in Canada that you’ll find useful when purchasing a car.
Definition of Car Equity Loans
Car Equity Loans or auto equity loans simply mean taking a loan using your car and paying it off gradually with the agreed interest.
However, borrowing money against your car puts you at the risk of losing your vehicle to the lender if you fail to meet the loan payments when due.
This type of car loan differs from home equity loans as you don’t need to own the car fully. So, even if you already used the car as collateral for a loan, you can still take another auto equity loan with it.
Category of Car Equity Loans
A car equity loan is a type of secured loan that implies that the borrower uses the car as collateral against the loan he wants to secure. Failure to meet the loan payments makes the lender the car’s legal owner.
Since car equity loans are secured on your car, reneging on your loan payments is not advisable, as failure to do puts your vehicle at risk. Before taking a car equity loan, ensure you understand the pros and cons and are ready to make timely payments.
How Much You Can Borrow?
When considering taking a car loan, you should always compare offers from two or more lenders to find the best one that suits you, and you should make sure that you go through the terms and conditions of the loan before signing.
How much you can borrow depends on:
- The lender you choose
- How much do you still owe on the vehicle (if any)
- Car’s market value.
Ways of Acquiring Car Equity Loans
Banks, online vehicle retailers, credit unions, dealerships, and online lenders offer auto-equity loans. However, their interest rates vary as it depends mainly on the:
- Lender’s set-prime rate
- Borrower’s credit score,
- Proof of income
- Type of car
- Loan duration
- Type of interest rate
Qualification Requirements
Car equity loan requirements vary, depending on the financial institution where you are getting it from. However, it generally includes the following documents:
- Government-issued identification
- Proof of residency
- Proof of income
- Registration of the vehicle in your name
- Comprehensive and collision car insurance
- You must be in the age of majority in your province or territory
- Consent to a credit rating check
Credit Score Requirements
A good credit score is not paramount to the lender because using your car as collateral gives him full ownership of your vehicle if you fail to make timely payments.
However, having a good credit score might reduce the interest rate you will pay on loans.
Variation of Interest Rates for Auto Equity Loans
Interest rate is a determining factor in knowing how much precisely the car loan will cost you as it is the extra money you will pay in addition to the principal amount you borrowed. According to WOWA, the average Canadian loan rate is 7.2%.
The total cost of your car equity loan will heavily depend on the lender you choose, as the interest rate varies. For example, if you are applying for a car loan at a bank or credit union, you can expect an APR (Annual Percentage Rate) of up to 36%, whereas online lenders charge up to 500% APR.
The table below shows lenders’ various interest rates on car equity loans in Canada.
| Lender | Amount ($) | Interest Rate (%) | Duration (Months) |
| Loans Canada | 500 – 50,000 | Up to 46.9 | 12 to 84 |
| Canada Drives | 500 – 35,000 | 29.9 – 46.9 | 9 – 60 |
| SkyCap Financial | 500 – 10,000 | 12.9 – 39.9 | 9 – 36 |
| CarLoans411.ca | 5,000 – 40,000 | Varies | 12 – 72 |
| Car Loans Canada | 7,500 – 59,995 | 3.9% + | 12 – 96 |
| Canada Auto Finance | 5,000 – 45,000 | 4.9 – 29.9 | 36 – 72 |
| Eden Park Vehicle Financing | Varies | 11.9 + | 12 – 84 |
| Splash Auto Finance | Up to 50,000 | Varies | 12 – 84 |
| TSafe Lend | Up to 50,000 | 8.9 + | 12 – 72 |
Fees on top of Interest Rates
Apart from the interest rate charged on car equity loans, there are other additional fees that you will incur when taking out a loan against your car in Canada.
- Documentary stamp tax: You can be charged a documentary stamp tax if you add a lien to your car’s title. This tax depends on your vehicle’s worth and your location (state).
- DMV lien fee: Whenever you add a lien to your car’s title, you will be charged a DMV fee of around $28 to 33$, based on your county. Some lenders cover this cost, while others don’t.
- Extension fees: Some lenders charge some money for extending the payment period if the borrower cannot pay the agreed monthly payment on time to avoid losing the vehicle. The amount, however, varies by lender.
Benefits and Drawbacks of a Car Equity Loan
Critically examining the pros and cons of opting for a car equity loan will help you weigh your options and make an informed decision.
Benefits:
- Easy qualification: The application process involved in securing a car loan is relatively fast and easy. You can use your car as collateral for a loan without good credit.
- Repayment options: A good credit score is not paramount for a car equity loan as long as you are confident of making timely payments.
- Owning your car is unnecessary: You don’t need to own the car fully. So, even if you already used the car as collateral for a loan, you can still take another auto equity loan with it.
- Longer loan terms: Car equity loans offer individuals the opportunity of securing a long-term loan, making it easier for borrowers to pay back as they have enough time.
Drawbacks:
- Possibility of car repossession: You risk losing your car, as taking out an auto equity loan might not be worth the risk if you cannot make your payments.
- Higher interest rates: The interest rate on auto equity loans can be expensive, especially for short-term loans.
- Full coverage car insurance required: Some lenders might require that you get credit insurance which is expensive and will not cover your loan
- Extra cost: One can incur extra fees, especially if you add a lien to your car’s title or fail to pay your monthly payments on time. The DMV lien and extension fees can be quite exorbitant.
Alternatives to Car Equity Loans
There are other options to consider if you doubt whether a car equity loan is right for you:
Auto Loan Refinancing
This option benefits those with solid credit scores still paying off an existing car equity loan. Here, the borrower can refinance his car loan and borrow another loan at a lower interest rate. Auto loan refinancing is less expensive but can take longer to qualify than an auto equity loan.
Personal Loan
You can also apply for a personal loan from banks, credit unions, or online lenders, but you must have a good credit score to qualify. However, personal loan interest rates are higher than car equity loans.
Bill Extensions
When you cannot repay your loan, you can ask your lender for an extension, but you are likely to be charged an extension fee, which can affect your credit score.
Cash-Out Refinancing
Having positive equity on your car enables you to refinance your car loan and get cashback such that even if you decide to sell your call, you will get enough money out of the transaction to pay off your loan in full. However, this will only be an option if you have good credit.
Borrowing From Family or Friends
Another viable option is to borrow from your family members or friends willing to lend you money. However, it is advised that you draw out an agreement to avoid future complications.
Home Equity Loans
Here, you can take out a home equity loan or get a line of credit, but it is risky as you may lose your home if you fail to pay your loan when due.
Car Title Loans
In a title loan, you must own your car fully and are required to relinquish your car title to the lender pending till you repay the loan; failure to repay the loan makes the lender the legal owner of the vehicle. It is a good option if you urgently need money, but it is risky and expensive.
Credit Cards
You can pay for your expenses using your credit card, but the disadvantage is that it will attract a higher interest rate.
Local Benefits/Resources
One can qualify for grants and other benefits offered by your county, province, region, or city. This can reduce the actual cost and help you save up for the expenses you want to fund.
Conclusion
A car equity loan is a type of secured loan that implies that the borrower uses the car as collateral against the loan he wants to secure, and failure to meet the loan payments makes the lender the car’s legal owner.
Since auto equity loans are secured on your car, reneging on your loan payments is not advisable, as failure to do puts your vehicle at risk.
FAQs
Should I get credit insurance?
Credit insurance protects you from missed payments on a loan if you cannot pay off the loan as of when due. Still, it comes with an extra cost as the coverage can be expensive and unnecessary, so weighing your options carefully is essential.
How does equity work on a car loan?
Equity implies the difference between your vehicle’s purchasing price (market value) and the amount you owe on the car. The loan amount the lender will offer you will depend on the equity you have in your car. So, if the market value of your car is higher than the principal amount of the loan, it implies that you have positive equity.
How much negative equity will a bank finance on a car?
Negative equity occurs when the principal amount you owe on your auto loan is higher than the vehicle’s purchasing price. Most banks finance almost 100% of the vehicle’s purchasing price, so you can still secure a loan even if your car has negative equity, but it attracts a high-interest rate.
Can I trade in my car when I still owe it?
Yes, you can. You can refinance your existing car loan and borrow another loan at a lower interest rate. However, this is mainly beneficial to those with good credit scores.
How much can you borrow in an auto equity loan?
How much you can borrow depends on; the lender you choose, how much you still owe on the vehicle (if any), and the car’s market value (how much the vehicle is worth).
