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With or Without Collateral? a Guide to Secured Car Loans

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Do you need a car but have low credit? Perhaps you’re considering secured car loans, but you’re not exactly sure what it is. A secured loan is a loan that requires some type of asset to reassure lenders.

The lenders can seize the asset if you default on the loan. An unsecured loan, on the other hand, doesn’t require collateral.

You can get an unsecured loan if you have a high income and a good credit score. Conversely, a secured loan is the best choice if you have collateral but have a lower income.

This article will highlight the differences between secured and unsecured loans in greater detail. Let’s explore. 

What Is the Difference Between a Secured and Unsecured Car Loan?

If you get a secured car loan, the car is the collateral. To reassure lenders, the car is the security they can seize if the borrower fails to pay back the loan. From there, the lender can sell the car to recoup the loss. 

A secured car loan is no different than other types of secured loans. A mortgage, for example, is a secure loan because lenders can take possession of the house if the borrower defaults. 

An unsecured loan doesn’t require collateral if the applicant has a high credit score. The lender assumes that a high-credit applicant can pay back the loan on time.

Those with lower scores are more likely to qualify for a secured loan. To qualify for the loan, you can pledge assets other than the car. 

  • Example: A borrower applying for a secured loan can pledge stocks to obtain approval.

The collateral can be anything that’s equal to or greater than the loan’s value.  

Advantages of a Secured Car Loan 

A secured car loan has numerous advantages over an unsecured loan. Lenders are less likely to repossess the vehicle if the collateral isn’t the car. The lender may allow you to pledge another asset besides the vehicle. 

The loan terms can be lucrative as well. Since the lender has collateral to offset the loan balance, you’re more likely to get better loan terms. Better terms allow you to manage your payments, and you’ll have more control over how you pay back the loan. 

Additionally, the collateral allows lenders to approve applicants with lower incomes. It’s a great option for borrowers who live paycheck-to-paycheck or have freelance income. 

  • Note: A secured car loan is the best option if you’re rebuilding your credit. The payments you make will slowly enhance your credit scores over time. 

Regardless of income status, borrowers will benefit from a lower interest rate. The collateral will ease the lender’s concerns about approving your loan. Therefore, they’re more likely to set a lower interest rate. 

That said, a secured loan has its disadvantages, most notably the seizure of your assets if you fail to pay back the loan. A secured will also place you at a disadvantage if the contract contains unfavorable terms.

Shop around to find the best rate for you. Check the penalties when reading the agreement, as some lenders have harsher rules than others. The best secured car loans are transparent and reveal all penalties and benefits upfront. You can use a car loan guide to help you find the best loan. 

Advantages of an Unsecured Car loan

An unsecured loan is an option for people who have a pre-existing relationship with a bank or credit union. Many applicants in this category can take out a personal loan. The borrower can get the loan from a bank and use it to purchase a vehicle. 

Borrowers in this category don’t have to secure financing through a dealership, which can be a laborious task. Those with high incomes and credit can shop around and find the best loan that suits their needs. 

Additionally, there’s a good chance that unsecured borrowers will borrow more than the car is worth. All applicants should only borrower what they can afford to pay back, but borrowing more allows you to cover additional costs, such as repairs. 

That said, an unsecured car loan can place borrowers at a disadvantage in the following ways:

  • Higher Interest Rates: The higher interest rates you’ll pay from a personal loan are unavoidable, and the loan could cost you more money in the long-term. Further, you could miss out on special deals from a dealership’s financing department. For instance, many dealership lenders offer 0% APR. 
  • The Risk of Default: Taking out a loan can still hurt your credit score if you default. Moreover, the default can stay on your credit report for seven years. 
  • Impeccable Credit: To get a personal loan, you must have excellent credit. Also, the lender can report late payments to your credit profile and drag down your score. 
  • Stable Income: Lenders typically look for long-term employment histories and higher-than-average incomes. Many lenders also have minimum income requirements. 

Are Secured Car Loans Right for Me?

Secured car loans are the best options for applicants with lower incomes and less-than-stellar credit scores. Secured auto loans require collateral prior to approval.

The assets you pledge can get you favorable loan terms and a lower interest rate. The collateral can be the car or any other type of valuable asset.

On the flip side, those with excellent credit scores can get an unsecured loan. However, these types of loans typically have higher rates. Therefore, secured loans are the best option for anyone regardless of financial status. 

Interested in reading more? Read more on our blog to learn about other finance topics. 

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