Car Equity Loans in Canada: How They Work, Benefits & Risks
What You Should Know
- A car equity loan lets you borrow money using your vehicle’s equity as collateral.
- Borrowers usually keep and use their car while repaying the loan.
- Interest rates are usually higher than those of typical personal loans and secured loans.
- Approvals can be fast, with some lenders offering funding the same day or within a few business days, depending on eligibility.
What is a Car Equity Loan?
A car equity loan lets you use your car as collateral to borrow money. This means that the lender will hold a lien on your car until the loan is fully paid off. The amount you can borrow is equal to your equity in the car, which is the difference between the car’s current value and the amount you owe on the car loan.
Car equity loans are often used by people who need quick access to cash, as they typically come with higher interest rates and fees than other types of secured loans. The rates typically start from around 9%, which is much lower than those of payday loans. Car equity loans can also be an option for people with bad credit or those who cannot qualify for traditional loans, or for those who need a larger loan amount than what unsecured loans can offer. Car equity loans are typically offered by alternative lenders like online lenders and online brokers, and it is uncommon for major banks and credit unions in Canada to offer them.
How much car equity do I have? 💡
Your car equity is the difference between what you owe on your car, if you have a car loan or other debts secured by it, and its current market value. For example, if your car is worth $40,000 and you still owe $15,000 on it, you have $25,000 in equity. If you have repaid all car loans and fully own the car outright, then your car equity is equal to its current value.
You don’t need to have your car fully paid off to borrow with a car equity loan, similar to how you don’t need to have paid off your entire mortgage to borrow more money with a home equity line of credit (HELOC). However, the more equity you have in your car, the more funds you may be able to borrow.
In some cases, it’s possible to have negative car equity. That’s when you owe more on the car than the car is worth. You won’t be able to get a car equity loan if you have negative car equity.
How Car Equity Loans Work?
Car equity loans work by putting up your equity in the car as collateral, similar to home equity loans and home equity line of credit (HELOCs). The main difference is that with a car equity loan, the lender will hold onto your car title instead of having a lien on your home. Since cars are a depreciating asset, and they are moveable, the lender will also charge higher interest rates to offset the higher potential risk.
Car equity loans are only meant to be used on a short-term basis, with car equity loan terms typically being for a few months. However, some lenders might offer loan terms for up to five years.
While you’ll have to hand over your car title to the lender, you won’t be handing over the car itself to the lender. You can still use and drive your car even with it put up as collateral for a car equity loan.
Where would the collateral charge on my car be registered?
Your lender will need to register your car, known as personal property, as an asset used for collateral in your province's personal property registry system. These are publicly accessible databases that can be used to see if there is an outstanding lien on an asset.
In Ontario, the Personal Property Security Act (PPSA) registration system is through the Personal Property Security Registration (Access Now). It’s a good idea to search through your province’s personal property registry system when buying a used car or other personal property to make sure there are no claims against it.
Pros and Cons of Car Equity Loans
| Pros | Cons |
|---|---|
| Quick access to cash | Better alternatives available |
| Easier approval | Potential for negative equity |
| Ability to keep and use your car | Risk of losing your car |
| Lower interest rates than payday loans | Higher interest rate vs. other secured loans |
Pros of Car Equity Loans
Under certain circumstances, car equity loans can have some benefits:
- Quick Access to Cash: Car equity loans can often be approved and funded the same day, making it a quick way to borrow money.
- Easier Approval: Car equity loans typically have higher chances of approval due to the car being used as collateral. Some lenders may even approve borrowers with poor credit or no credit history.
- Ability to Keep and Use Your Car: Unlike pawning your car, where you physically hand over your vehicle, you can typically still use and drive your car during the loan term.
- Lower Interest Rates than Payday Loans: As a secured loan, car equity loans typically have lower interest rates compared to other predatory loans, such as payday loans, which can often have annual percentage rates (APRs) of 300% or more.
Cons of Car Equity Loans
While they can provide quick access to cash, there are reasons why you shouldn’t use car equity loans:
- Higher Interest Rate vs. Other Secured Loans: Car equity loans usually have a higher interest rate compared to other secured loans, such as a home equity loan, making it a more expensive way to borrow money.
- Risk of Losing Your Car: If you default on your loan payments, the lender has the right to repossess your car and sell it to recoup their losses. This can have a major impact on your daily life if you rely on your car for transportation.
- Potential for Negative Equity: If the value of your car decreases over time, and the car loan interest accumulates, you may end up owing more than what your car is worth. Negative equity can make it difficult to sell or trade in your car in the future.
- Better Alternatives Available: There may be better alternatives available, such as personal loans, lines of credit or credit cards, that have lower interest rates and don't require collateral.
Applying for a Car Equity Loan
Qualifying for a Car Equity Loan
To qualify for a car equity loan, you will typically need to meet the following requirements:
- Proof of Ownership of the Vehicle: You will need to provide documentation such as your car title or registration to prove that you are the owner of the vehicle. The lender will also check your vehicle identification number (VIN).
- Adequate Car Equity: Lenders will assess the value of your vehicle and determine how much equity you have. You’ll need to have enough equity to cover the loan amount you are applying for.
- Proof of Income: Lenders require proof of income to ensure that you have the ability to repay the loan. This can be in the form of pay stubs, bank statements or tax returns. Some lenders may not require employment.
- Valid Driver's License: Lenders may require a valid driver's license to confirm your identity. You’ll also need to be at least 18 years of age, and you must have car insurance.
Assessing Your Car’s Equity Value 💡
The amount you can borrow with a car equity loan will depend on the value of your vehicle. To determine this, your lender may conduct a vehicle inspection. This can include checking for any damages or modifications that may affect the car's worth.
Other online lenders that don’t require a physical inspection of your car might require you to send pictures, and they may use services such as Kelley Blue Book (KBB) or Canadian Black Book to assess the car’s value. KBB values are based on factors such as make, model, year, mileage, and condition of the vehicle.
If you are required to send pictures, this usually includes pictures of the front, back, and sides of the car, as well as the car’s odometer showing mileage, the driver's side door with the VIN sticker, and the interior of the car.
Once the lender has determined the value of your vehicle, they will typically offer you a loan amount based on a percentage of that value, less outstanding debt that is currently secured by your car.
Researching and Comparing Lenders
Before applying for a car equity loan, it's important to research and compare multiple lenders to find the best option for your specific needs. Some factors to consider when evaluating lenders include:
- Interest rates: Compare interest rates from different lenders to find the lowest rate possible.
- Fees and charges: Be aware of any additional fees or charges that may be associated with the loan, such as application fees or prepayment penalties. Lenders may also charge a vehicle inspection fee.
- Reputation and reviews: Look for reviews and feedback online to get a better understanding of the lender's reputation and customer service.
- Payment options: Ask about the various payment options available. Some lenders can send you an Interac e-Transfer within hours, or they might deposit the funds into your bank account, which can take longer.
Car Equity Loans vs. Car Title Loans
Car equity loans are often confused with car title loans. While they are very similar and use your vehicle as collateral, there are some key differences to consider between car equity vs. car title loans.
| Category | Car Equity Loans | Car Title Loans |
|---|---|---|
| Ownership | You can potentially qualify for a car equity loan while still having an outstanding car loan. | You need to fully own the vehicle to qualify for a car title loan. |
| Loan Term | Loan terms range from a few months to several years. | Usually have very short loan terms, sometimes as short as 15 to 30 days. |
| Interest Rates | Interest rates are typically lower, starting from around 9%. | Interest rates are typically higher, reaching up to 35% in some cases. |
| Loan Amount | Lenders may offer loan amounts of up to 100% of the equity. | Lenders typically offer loans of up to 50% of the car’s value. |
| Qualification | Lenders usually require proof of income and check your credit. | Usually have very low qualification criteria and often don’t need credit checks. |
Overall, car equity loans are more similar to traditional loans, where the lenders can qualify for a manageable loan, with lower interest rates and longer terms. Whereas, car title loans are very short-term, high-interest loans that borrowers who need emergency cash for a short duration may use, making them more similar to predatory payday loans.
Alternatives to Car Equity Loans
Personal Loans
These are unsecured loans that can be used for various purposes, such as consolidating debt or paying for unexpected expenses. Banks and credit unions may offer personal loans with lower interest rates compared to car equity loans. However, personal loans aren’t usually available to those with poor credit history, or they might have high interest rates in the case of online personal loan lenders.
Credit Cards
Depending on your credit score, you may be able to qualify for a credit card with a low interest rate or a balance transfer offer. This can be a more cost-effective option than taking out a car equity loan. If you only need a small amount of money, using a credit card may be a more affordable option. However, applying for and receiving a credit card can take weeks, but if you already have one, you can quickly borrow money with cash advances.
Home Equity Loans
If you are a homeowner, a home equity loan may be a more cost-effective option as it typically offers lower interest rates compared to car equity loans. However, keep in mind that your home is used as collateral for the loan.
Negotiating with Creditors
If you are struggling with debt, negotiating with your creditors for a lower interest rate, extending your payment plan or consolidating your debt may be a better solution than taking out another loan. Debt relief alternatives include consumer proposals, debt settlement, or a debt management plan (DMP).
Conclusion: Only If You Quickly Need Cash
While car equity loans can provide quick access to cash, they shouldn’t be one of your first options due to their possibly higher interest rates and fees. It's important to carefully research and consider alternative options first before committing to this type of loan. Remember, your vehicle is used as collateral for the loan, so failing to make payments can result in losing your car.
Disclaimer:
- Any analysis or commentary reflects the opinions of WOWA.ca analysts and should not be considered financial advice. Please consult a licensed professional before making any decisions.
- The calculators and content on this page are for general information only. WOWA does not guarantee the accuracy and is not responsible for any consequences of using the calculator.
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