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’ll get the 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 the 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 2018!
LenderVariable APREligible Degrees 
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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 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% 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 Month/Day/Year, 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 08/21/18. 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 hello@earnest.com, or call 888-601-2801 for more information on ourstudent loan refinance product.

© 2018 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

APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.

Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.

However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.


3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance:
    Fixed rates from 3.899% APR to 7.979% APR (with AutoPay). Variable rates from 2.470% APR to 6.990% 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 2.470% APR assumes current 1 month LIBOR rate of 2.30% plus 0.91% 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. 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.
  2. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

4 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.


5 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). 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 2.28% effective October 10, 2018.


6 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Education Refinance Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of November 1, 2018, the one-month LIBOR rate is 2.29%. Variable interest rates range from 2.79%-8.39% (2.79%-8.39% APR) and will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a cosigner. Fixed interest rates range from 3.75%-8.69% (3.75%-8.69% APR) based on applicable terms, level of degree earned and presence of a cosigner. Lowest rates shown require application with a cosigner, are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan.
  2. Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensbank.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
  3. Citizens Bank Education Refinance Loan Eligibility: Eligible applicants may not be currently enrolled. Applicants with an Associate’s degree or with no degree must have made at least 12 qualifying payments after leaving school. Qualifying payments are the most recent on time and consecutive payments of principal and interest on the loans being refinanced. Primary borrowers must be a U.S. citizen, permanent resident or resident alien with a valid U.S. Social Security Number residing in the United States. Resident aliens must apply with a cosigner who is a U.S. citizen or permanent resident. The cosigner (if applicable) must be a U.S. citizen or permanent resident with a valid U.S. Social Security Number residing in the United States. For applicants who have not attained the age of majority in their state of residence, a cosigner will be required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Education Refinance Loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, certification of borrower’s student loan amount(s) and highest degree earned.
  4. Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  5. Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
  6. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply.

2.47% – 6.99%3Undergrad
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2.50% – 7.24%5Undergrad
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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. 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 understand what you are buying, and consult 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. Please do your homework and let us know if you have any questions or concerns.