SoFi

If you’ve owned your car for several years, it may be a source of cash even if you don’t want to sell it. Enter auto equity loans, which lets you turn the equity you have in your car into a loan you can use for any purpose.

While the risks and interest rates may not be suitable for every borrower, a strategic approach to this loan can quickly get you the cash you need. Here’s how to tell if a car equity loan makes sense for you.

How Auto Equity Loans Work

Vehicle equity loans depend on how much a borrower’s car is worth versus how much they owe on the car. For example, say your car is worth $15,000. You’re almost finished paying off your car loan and only owe $1,000 on it. So, you have $14,000 of equity you can leverage with an auto equity loan.

Your equity in your vehicle is the basis for a loan, and terms vary by lender. For example, some lenders may loan a maximum of 100% of your auto equity, while others loan 125%.

Like any loan, a car equity loan comes with terms and conditions. This includes the interest rate, repayment schedule, and loan fees.

However, the unique aspect of auto equity loans is the vehicle serves as collateral. The advantage is that you can obtain better terms and rates than an unsecured loan. The downside is that the failure to repay the loan gives the lender the right to repossess the vehicle to recoup their losses.

Auto Equity Loan vs. Auto Title Loan

Auto title loans and car equity loans sound similar, but they have stark differences with severe implications for borrowers. Auto equity loans allow you to turn the equity you have in your car into a loan you’ll repay over the coming months or years. Defaulting on the loan can result in repossession, but the loan terms are typically affordable enough for borrowers to avoid this outcome.

Auto title loans also use equity in your car but have harsher terms and rates. Typically, auto title loans give the borrower one month to repay the loan with higher interest rates than auto equity loans.

The sole upside is that these loans have minimal credit requirements, making them accessible to more borrowers. The downside is that the loan terms are so stringent that borrowers often fail to repay the loan within 30 days, default, and lose their vehicle.


💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.

How to Get an Auto Equity Loan

Getting an auto equity loan means assessing your equity, finding a lender, and applying. Here’s the step-by-step guide:

Check Your Equity Level

Get an accurate estimate of your car’s current market value. An online tool, such as Kelley Blue or Edmunds, can help. Once you know the value, subtract any outstanding loan balance on your car from it. The result is your equity. Remember, lenders use the equity amount to determine the maximum loan amount you can receive.

Shop for a Lender

Look for reputable lenders that offer auto equity loans. Specifically, auto lenders, credit unions, and online lenders offer these loans. Peruse customer reviews and gather offer information, including interest rates and loan fees. In addition, lenders have different eligibility requirements, such as equity amount and credit score standards.

Apply for the Loan

Once you choose your lender, prepare the required documentation for the application, including proof of income, identification, vehicle title, and proof of insurance. Then, you can apply using your lender’s website, visiting a physical location, or contacting the lender by phone.

If approved, carefully review the loan terms before accepting. Pay attention to interest rates, repayment schedules, and any fees associated with the loan.

Pros and Cons of an Auto Equity Loan

Like any financial decision, getting a car equity loan has advantages and disadvantages. Here are some potential pros of auto equity loans:

•   Competitive interest rates: Because you secure the loan with your vehicle, you’ll likely get a lower interest rate than an unsecured loan or credit card.

•   Less-stringent approval: Because a car secures the loan, borrowers with lower credit scores or a less-than-perfect credit history are more likely to qualify.

•   Quick funding: Auto equity loans often provide a faster funding process than traditional loans. In some cases, borrowers can receive funds within a day of approval.

•   Customizable terms: Some auto equity lenders may offer flexibility in repayment schedules, allowing borrowers to customize the loan terms to better suit their financial situation. For example, you can shorten the term to reduce how long the loan lasts, reducing total interest costs.

However, consider the following cons as well:

•   Risk of losing your car auto equity: Auto equity loans are secured loans, meaning the vehicle serves as collateral. If you fail to repay the loan according to the agreed-upon terms, the lender can repossess and sell your car.

•   Full-coverage insurance requirements: Many auto equity lenders require borrowers to maintain full-coverage insurance on the vehicle throughout the loan period. This coverage costs more than minimum liability insurance.

•   Uncommon among lenders: While auto equity loans are available, they might not be as common or widely offered as other types of loans. This drawback can limit the options available to borrowers. In addition, your current auto lender might not offer this loan, meaning you’ll end up having auto loans with multiple lenders.

Auto Equity Loan Alternatives

A vehicle equity loan is just one way to get the financial assistance you need. Other loan tools are available. Here are some to consider.

Personal Loans

Personal loans can be used for various purposes, including financing a car or covering regular expenses. Unlike car equity loans, personal loans are unsecured, meaning they do not require collateral like your vehicle.

Interest rates on personal loans can vary based on your creditworthiness and may be higher because they don’t have collateral. However, borrowers with higher credit scores generally qualify for lower interest rates. Personal loans usually have fixed monthly payments over a predetermined term.

New Credit Card

Credit card companies frequently offer credit cards with low or no APR to draw new customers. So, you can apply for a new card and take advantage of the promotional interest rate. For example, if you get a new card with 0% APR for one year, you only have to make the minimum payment on the balance each month for the first 12 months.

This feature allows you to accrue debt without paying it back immediately. Just remember that when the promo period ends, any balance will start accruing the card’s regular APR.

In addition, credit cards are unsecured, so no collateral is needed.

Home Equity Loan

A home equity loan is like a car equity loan, but it uses the equity in your home instead of your vehicle. It is a secured loan because your home serves as collateral, and the debt becomes a second mortgage.

Home equity loans typically have fixed interest rates and fixed monthly payments over a specific term. The loan amounts can be larger because homeowners can build up hundreds of thousands of dollars of equity to tap.

Plus, interest rates on home equity loans are often lower than those on unsecured loans. However, you could lose your home if you default on the loan.

Auto Loan Refinance

Car loan refinancing involves replacing your existing auto loan with a new one, usually with better terms such as a lower interest rate or an extended repayment period. Doing so usually lowers your monthly payment, making your loan more affordable.


💡 Quick Tip: In a climate where interest rates are rising, you’re likely better off with a fixed interest rate than a variable rate, even though the variable rate is initially lower. On the flip side, if rates are falling, you may be better off with a variable interest rate.

The Takeaway

Car equity loans leverage a vehicle’s equity for access to cash with low waiting times. While offering advantages such as potentially lower interest rates and quick funding, they can also pose significant risks, including possibly losing the car. Full-coverage insurance requirements and the relative uncommonness of these loans among lenders add to their drawbacks.

Individuals considering auto equity loans should carefully assess their financial situation and alternatives, exploring options like personal loans, credit cards, home equity loans, or auto loan refinancing. Thorough research into reputable lenders is crucial to making an informed decision that aligns with their financial needs and goals.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Is it good to have equity in your car?

It’s good to have equity in your car because you can use it as collateral to get an auto equity loan or sell your car for a profit.

Can you cash out auto equity?

You can turn the equity you have in your car into cash with a cash-out refinance from a lender. Doing so will provide you with a lump sum equal to your equity amount and replace your current auto loan with a new loan with an accordingly larger balance.

Is it a good idea to get an auto equity loan?

If you have thousands of dollars in equity and can’t access other forms of debt, a vehicle equity loan can provide a quick solution. However, it’s crucial to carefully evaluate if you can afford the monthly payments before deciding. Otherwise, you may lose your car if you fail to repay the loan.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL1023016

The first step is to fill out an application with your carrier of choice. You’ll want to be well versed in whole and term, whether a medical exam is required, contestability, and the right amount of insurance needed.

Many jobs come with a benefits package on top of paid wages or salary — things like, health insurance, dental insurance, and 401(k) retirement accounts. Employer life insurance may also be included in a benefits package to give an employee’s beneficiaries some added financial security in the event of their death.

According to the U.S. Bureau of Labor Statistics, approximately 98% of workers with access to employer life insurance choose to participate. But is life insurance offered through your employer enough to take care of your loved ones if you pass away?

There’s no one-size-fits-all approach to financial planning and purchasing life insurance. Depending on an individual’s unique situation and financial goals (or obligations), the amount of life insurance coverage needed can vary from person to person.

To help determine how much life insurance is right for you, let’s break down the basics of employer life insurance and how different policies might work in practice.

What Is the Typical Coverage Offered?

Commonly, employers that provide life insurance purchase a group term policy for their employees. Term life insurance grants coverage for a specific time period, known as the term, in exchange for regular payments (called premiums) by an employer or the insured employee. Unlike individually purchased term insurance, the term for group insurance is typically the duration of the employ of the insured.

Group term life insurance can also vary by amount. An employer may offer a flat rate of coverage to their employees. Or, in some cases, an employer may calculate the total life insurance coverage according to an employee’s current salary. For example, an employer life insurance policy may pay out one, two, or three times the employee’s annual salary.

While the benefit coverage amount under employer life insurance may vary by salary, you may still qualify for a group policy even if you’re older or have pre-existing conditions and less-than-perfect health. However, note that coverage may lapse when employment ends or if an employee switches from full-time to part-time work. Some companies offer policies that are “portable,” meaning the employee can take the policy with them when/if they leave the employer.

Life insurance could reinforce a long-term financial plan.

If an insured employee dies during the policy’s term, the insurance company is then responsible for paying the coverage amount to the designated beneficiaries, barring a few exceptions, like suicide within two years of the policy start date or death from an exempt hazardous activity (e.g. piloting a plane).

This payment is called a “death benefit,” and can be paid as a lump sum or in installments depending on a policy’s conditions. On the other hand, if an insured employee dies after the insurance term ends, their beneficiaries do not receive a payout of death benefits.

Recommended: What Is Life Insurance & How Does It Work?

How Much Can Employer Life Insurance Cost?

For employers with many employees, obtaining a group life insurance policy parallels wholesale purchasing, meaning that the price per individual is generally less than if each employee paid for their own policy. Therefore, employment life insurance is usually very affordable for employees, if not free, for the most basic coverage.

However, this sort of baseline benefit does not account for additional coverage, which employers may also offer (on top of the standard group policy) at the partial or full expense of the employee.

Determining if extra coverage through an employer is cost effective may depend on several factors, including age, health, income, and number of dependents. For example, smokers can pay up to two or three times more on life insurance premiums than their non-smoking counterparts.

Keep in mind that employer life insurance may be subject to payroll taxes, such as Social Security and Medicare. For any benefits coverage greater than $50,000 that is paid or subsidized by an employer, the total amount exceeding $50,000 would be counted as employee income by the IRS.

The threshold for taxation on coverage for spouses and dependents is significantly lower, at just $2,000. Any employer life insurance plan with coverage above $2,000 would be liable for taxation in its entirety.

Is It Possible to Switch Coverage?

Employer life insurance can be affordable, but it may not be very customizable or flexible.

Since the employer holds the group policy with a specific insurance company, employees do not usually have the individual discretion to shop around for the coverage offered in a benefits package.

Opting for an alternative or supplemental life insurance policy may require undergoing a life insurance medical exam. This exam could consist of a verbal questionnaire with a medical professional and collecting blood and/or urine samples.

Together, medical history and personal information are some of the different factors used to decide whether an applicant is eligible for life insurance coverage.

Information from the medical exam can impact the cost of the eventual insurance premium as well, assuming the applicant is deemed eligible. In this scenario, younger, healthier employees may opt to switch to an individual life insurance policy, since they could obtain a lower rate that may last for decades of coverage.

Since employer life insurance coverage can lapse when employment ends, it may be useful to research various policy options (or speak with a benefits specialist at your job) to ensure coverage is not interrupted when jobs change.

Recommended: How to Buy Life Insurance

What Happens If I Change or Lose My Job?

For many working adults, changing jobs is necessary for career growth and achieving financial goals. But changing or leaving a job may come with some financial challenges beyond a disruption to income. Employer benefits, such as health insurance, 401(k) retirement account, and life insurance may be put on hold or not carry over to a new employer.

Some insurance companies may let you transfer to a new employer’s policy, especially if they are the new employer’s insurance provider. In some cases, it may be possible to convert a former employer’s group term policy to individual term or whole insurance with the same insurance company.

When life insurance had previously been paid for or subsidized by an employer, taking out an individual policy could translate into an increased individual monthly expense. That’s because the policyholder, not the employer, would now be paying the life insurance premiums.

Whole life insurance, sometimes called permanent life insurance, is generally more expensive than term policies, since it can cover an insured individual for life.

What About an Additional Policy?

Employer life insurance could provide at little to no cost basic coverage for a family in the event of an unexpected death. But many people decide to take out additional insurance or expand their coverage through a rider, which is an add-on that allows insured individuals to customize their policy to their needs.

Cost and conditions for riders can vary between insurance providers. The following are some common types of riders that might supplement an existing life insurance policy:

•   Accidental Death Rider: If the insured individual dies from an accident, a greater death benefit is paid out to beneficiaries. This could be advantageous for a working parent to take care of surviving family’s future expenses if the unexpected were to happen.

•   Accelerated Death Benefit Rider: An insured individual could receive a portion of their death benefits while they’re alive if a diagnosed terminal illness is expected to significantly reduce their lifespan. This could help pay for the sudden cost of care and treatment, but might be subtracted from the amount family and beneficiaries receive upon the insured person’s death.

•   Spouse Insurance Rider: This rider can add a spouse to an insured person’s policy instead of taking out separate life insurance for them.

•   Waiver of Premium Rider: This rider can waive the need to pay insurance premiums while maintaining coverage, if an insured person becomes permanently disabled or can no longer work due to an injury or illness. Policyholders who are at risk due to dangerous jobs or family history may find this sort of policy worthwhile.

In addition to considering the perks and costs of riders, comparing term and whole life insurance is helpful for finding the right policy for you.

Determining How Much Coverage You Need

Everyone’s situation is different. And, securing life insurance may provide confidence and reinforce a long term financial plan. To figure out how much life insurance coverage may be needed, it can be helpful to first get an accurate picture of your finances and likely future expenses.

For people with children and dependent family members, a breadwinner’s death could result in lost income that supported essential spending, such as groceries, rent or mortgage payments, and utilities. It could also create additional expenses for childcare or a home health aide, if a surviving parent or caregiver then needs to work.

There are also down-the-road expenses, like retirement and college tuition for children, that could be impacted by the loss of a spouse, partner or parent.

Unpaid debt — such as, a mortgage loan, credit card balances, and student loans — are some long-term payments to factor in — since cosigners or the estate could still be left with the burden of making payments on certain debts. (Note that estate and debt laws vary from state to state).

Death can be accompanied by notable end-of-life expenses, too. On average, funerals cost between $7,000 and $12,000 depending on location and whether the deceased is buried or cremated.

In addition to savings and investments, life insurance can offer a financial safety net and support the future of those left behind.

The Takeaway

Employer life insurance can be an asset to a family’s financial security, as typically it grants coverage for a specific time period. The benefit coverage amount may vary by salary, and older employees or those with pre-existing conditions may still qualify for a group policy. Coverage could expire when your employment ends or if you move from full-time to part-time work. If you need more coverage, you may decide to take out additional insurance on top of your employer life insurance.

SoFi has partnered with Ladder to offer competitive term life insurance policies that are quick to set up and easy to understand. Apply in just minutes and get an instant decision. As your circumstances change, you can update or cancel your policy with no fees and no hassles.

Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, SoFi Technologies, Inc. (SoFi) and SoFi Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderlifeTM policies. SoFi is compensated by Ladder for each issued term life policy.
Ladder offers coverage to people who are between the ages of 20 and 60 as of their nearest birthday. Your current age plus the term length cannot exceed 70 years.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPRO-Q225-008

How many life insurance policies can you have? More than one, if needed.

Thinking about your family’s financial security? Life insurance could help put a plan in place for the unexpected and cover a myriad of expenses.