How Luis Used His Car to Save $5,000 on Student Loans

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You might have heard of borrowing against home equity to pay off student loans. But could you use car equity in a similar way?

Luis Valdez-Jimenez, who has a JD and an MBA and works as a contract specialist, did just that. He even wrote about it for The Penny Hoarder. Valdez-Jimenez used his 2015 Chrysler to secure a $20,000 loan with a 2.49% APR – less than half the 6.50% APR of his student loans.

“Using an auto equity loan the way I did is a relatively brand-new idea,” Valdez-Jimenez told Student Loan Hero in an interview. But he thinks it’s a strategy worth exploring.

“You might be surprised at how easy it is to do and at the rates you’re offered,” added Valdez-Jimenez.

What is an auto equity loan?

Like other car loans, an auto equity loan is secured by your car. Your vehicle acts as the collateral a lender can use to recoup its money should you be unable to repay the loan.

In the case of an auto equity loan, you borrow against the value of the car you own. Your car equity follows this formula:

  • Current value of the car – (minus) the amount of any debt = your car equity

So, if you own a paid-off car worth $15,000, you have $15,000 in equity. If you owe $5,000 on the same car, you have $10,000 in equity.

Can an auto equity loan help you refinance student loans?

Refinancing your student loans with an auto equity loan may help you get lower interest rates.

“The main reason why student loans tend to be higher is there’s no collateral – it’s an unsecured loan rather than a secured loan,” Valdez-Jimenez explained.

While you might get value from your debt through your education, a degree isn’t something a lender can repossess.

“But with an auto equity loan, there is collateral,” said Valdez-Jimenez: your car. This collateral lowers a lender’s risk, so auto equity loans might offer lower interest rates than student loans do.

“That’s a double-edged sword,” Valdez-Jimenez said. “You could get lower interest rates. If you struggle with making your payments or fall behind, your car is at risk.”

The right way to use an auto equity loan

But is an auto equity loan worth borrowing?

Well, that depends on whether you can get a good enough deal that refinancing makes sense, according to Valdez-Jimenez.

“I would recommend an auto equity loan if you have some equity in your car, you have good credit, and you’re getting good rates from a reputable institution,” Valdez-Jimenez added.

If you meet those guidelines, it could be worthwhile to look into this option. Here’s what you should consider as you explore the possibility of using an auto equity loan to refinance debt.

1. Find out how much car equity you have

A prerequisite of using an auto equity loan is owning a car with enough value to act as collateral. That fact alone will keep many people from using this strategy, Valdez-Jimenez pointed out.

“I realize a lot of younger people might not be able to utilize it because they don’t have the equity,” Valdez-Jimenez said.

However, some young people have cars that were gifted to them or that they purchased before getting serious about paying down debt. These vehicles can be leveraged to get better rates.

Even if you still owe money on your car, however, don’t assume this option isn’t a possibility for you.

“Some people might not realize they are driving a vehicle with significant equity in it,” Valdez-Jimenez said. “Even $5,000 can make a difference.”

You could get your best deals for a car that’s less than five years old. And many lenders won’t approve an auto equity loan for a car that’s more than 10 years old. Look up your make and model on appraisal sites like these to see what your equity is:

2. Shop for a trustworthy lender

Finding a lender that offers an auto equity loan can be tricky, as many major banks don’t offer this option. A local credit union or community bank might be a better bet to find auto equity loans – and your best rates.

“Make sure you go to an institution that’s highly reputable, preferably one that you have experience with,” Valdez-Jimenez advised. “There are plenty of sketchy-looking financial providers out there, so you need to really do your homework and find an institution you trust.”

He added a few more tips:

  • Avoid car title loans, which are easy to confuse with auto equity loans. “One of the key elements of a reputable financial institution is [it] won’t offer you ridiculous credit conditions – like having to pay it back in 30 days or [charging] high interest rates,” explained Valdez-Jimenez, all of which are common for car title loans. “Don’t go for a loan shark or quick cash shop.”
  • “Trust your gut and trust your feelings,” Valdez-Jimenez said. “Practice good judgment and know where to look.” If something feels off or you’re uneasy about a lender or your terms, pass on the offer.
  • “Be very clear and upfront about your goals,” Valdez-Jimenez added. If you know what you’re looking for and what you need in an auto equity loan, you’ll weed out options that aren’t a good fit more quickly.

3. Understand the trade-offs of an auto equity loan

There are, of course, potential drawbacks to refinancing student loans with an auto equity loan. Before you take this step, make sure you understand the potential risks to your finances; an uninformed decision can quickly turn to regret when something goes wrong.

You could lose your car

If you default on a car equity loan, the lender has the right to take your vehicle, which you likely need to commute to work and live your life.

Losing your car could put your job – and the income that comes with it – at risk. And if you lose your income, you could default on this debt. If you can’t live with that risk, have poor money management, or would have trouble keeping up with payments, an auto equity loan might not be right for you.

You’ll give up federal student loan protections

By refinancing federal student loans as a car equity loan, you’ll lose out on several protections and benefits federal student loans offer, including options to pause or adjust payments, such as:

Without these options, it will be harder to keep up with your new loan payments should a financial crisis arise, such as job loss or emergency expenses. Refinancing in this way will also make you ineligible for the Public Service Loan Forgiveness Program.

You might not get that great of a deal

Lastly, you’ll need to see how good the deal is before you decide if the savings will outweigh the potential trade-offs.

“If the new rate won’t be much better, it might not be worth losing the protections of federal student loans,” Valdez-Jimenez said, or putting your car on the line.

“Find out, based on your credit score and the equity you developed, what kind of rates you’re likely to get on an auto equity loan,” Valdez-Jimenez said. “And then you can compare those to the student loan rates you’re already paying.”

You can calculate the savings you could expect using our refinancing calculator.

Consider alternatives to an auto equity loan

If you want to leverage your car to help repay student loans or are interested in getting lower student loan rates, an auto equity loan isn’t your only option.

Sell your car

“Consider other options like selling your vehicle to get a cheaper one,” Valdez-Jimenez said. You also could bike, use public transit, or become a one-car household and then use the proceeds from the sale to pay off student debt.

Get a cash-out auto refinance

Another option that’s similar to an auto equity loan is a cash-out refinance auto loan. Some lenders will allow you to refinance an existing loan at a new, higher balance, paying out the difference between your old loan and new loan in cash.

For instance, if you owe $5,000 on a $15,000 car, you might be able to refinance to a new auto loan of $10,000. You would pay off the previous $5,000 and have $5,000 in cash.

Use your car for a side hustle

Maybe you can’t cash out on your car’s value to repay student loans. But you can use it to build a side hustle and rack up some income. Here are a few ideas to get you started:

Any extra money you earn from your side gigs can be used to pay down your student debt.

Student loan refinancing

Refinancing student loans with a private lender might also be a better option than getting an auto equity loan to pay off student debt. The best student loan refinancing lenders offer rates that rival or beat auto equity loan rates.

Think carefully before pursuing auto equity loans

Auto equity loans are still relatively new and largely untested.

“If you have good, steady employment, high credit, you’re good with money – it’s a good thing to at least consider,” Valdez-Jimenez said. The strategy Valdez-Jimenez utilized is an example of a smart way to leverage a car equity loan to your advantage.

Just remember: Even though this option is intriguing, it’s risky and won’t be right for everyone.

Interested in refinancing student loans?

Here are the top 6 lenders of 2020!
LenderVariable APREligible Degrees 
1.99% – 5.64%1Undergrad
& Graduate

Visit Earnest

1.89% – 5.90%2Undergrad
& Graduate

Visit Laurel Road

2.25% – 6.09%3Undergrad
& Graduate

Visit SoFi

1.89% – 6.77%4Undergrad
& Graduate

Visit Splash

2.39% – 6.01%Undergrad
& Graduate

Visit Elfi

1.99% – 5.41%5Undergrad
& Graduate

Visit CommonBond

Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.


2 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of September 9, 2020. Information and rates are subject to change without notice.
 


3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 2.99% APR to 6.09% APR (with AutoPay). Variable rates from 2.25% APR to 6.09% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.18% plus 2.32% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. 

4 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.


5 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. ‍All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.16% effective August 10, 2020.

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.