While car loans are not very common, they allow you to borrow against the equity you have in your car. Your equity is the difference between your car loan balance and how much your car is currently worth. If you have equity in your car and need to borrow money, this could be an option worth pursuing.
We’ll show you how auto loans work to help you decide if this is the case type of personal loan is right for you.
How automatic stock loans work
When you take out a car loan, your lender will offer you a loan based on the equity you have in your car. If you paid off your car loan and you owe it for free and clearly, your equity would equal the current market value of the car. However, if you still owe money on your loan, your equity is equal to the present value of the car minus the balance of your loan.
For example, if the car is worth $ 20,000 and you owe it $ 5,000, then 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 allow you to borrow your entire equity (like the $ 15,000 in the previous example), while others offer loans up to 125% of your equity, which would add up to $ 18,750 ($ 15,000 x 125%) in this case