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Is Car Equity Release Useful or Dangerous?

By: J.A.J Aaronson - Updated: 15 Jul 2010 | comments*Discuss
Car Equity Release Loan Secured Credit

Car equity loans have become increasingly popular in recent times. Often marketed at those with poor credit histories, they can provide a loan to individuals who would otherwise not be able to borrow.

But this type of loan also comes with significant risks, and can be very expensive. It is therefore vital that you understand the nature of the agreement before you take any action.

What is car equity release?

It is very common for an individual’s car to be their second most valuable asset, after their home. But, just like a property, this asset is very illiquid – meaning that it is very difficult to get at that value.

Car equity release schemes, at their most basic, allow you to borrow against the value of your vehicle. Just like a mortgage, they use the asset (in this case, the car) as collateral for the loan. They are therefore a type of secured lending.

What are the benefits?

Car equity release loans can be very flexible. The amount that you can borrow is dependent on the value of your car – meaning that you can efficiently get at the value that would otherwise be locked away in your vehicle.

Loans of this type can also be received quickly and easily; indeed, the process is often as simple as providing the lender with proof that you are the sole registered owner of the vehicle. Many people are also attracted by the fact that credit checks are rarely required by lenders in these circumstances.

What are the risks?

There are, however, significant risks associated with car equity loans. Primarily, as with any secured loan, if you do not pay the money back then your asset will be repossessed. Even once this has been done, you may well still find yourself with outstanding debts as assets are often sold by lenders at prices significantly below their true value.

Car equity loans can also be very expensive. They are generally designed for people who have found it difficult to gain credit through more conventional means, and are often offered as a short-term solution to cashflow problems. If you are considering a car equity loan it is vital that you properly understand the cost, which can vary significantly from lender to lender.

What are the alternatives?

There are many potential alternatives to car equity loans for those who cannot find credit elsewhere.

To begin with, if you need a relatively small amount of cash to tide you over until payday, you might consider a short-term ‘bridging’ loan. While these loans are also expensive, they can provide a less risky way of getting the cash you need quickly.

Alternatively, you might consider applying for more conventional credit. An increasing number of lenders are returning to the ‘sub-prime’ market, meaning that those with poor credit histories may again be able to get a loan – albeit on rather unfavourable terms.

Above all, it is important to understand the nature of a car equity loan. If you do not keep up with the repayments, you will lose your vehicle. Even if you do pay the money back, you are likely to be charged significant fees. That said, if you need a short-term cash injection and you do not mind a secured loan, this type of borrowing could be a good option.

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