03 Mar Secured vs. Unsecured Auto Loans
If you’re like most people looking for a new car, you’ll need some help paying for it. You begin your search and come across both ‘secured’ and ‘unsecured’ loan alternatives, but you may not be sure of the difference between the two and which might be best for your situation.
Simply put, a secured loan protects a lender if you fail to repay a loan using collateral—a piece of your property with a monetary worth that may be used as security. On the other hand, unsecured loans are not attached to any single asset.
The difference could affect your chances of getting a personal loan, the interest rate you’ll get, and if you’ll have to put up some collateral to get the loan.
Are you unsure what the distinction is? Let’s look at how secured vs unsecured auto loans function and what you should know before deciding which personal loan for veterans is best for you.
What Is a Secured Loan?
Most loans associated with vehicle purchases are secured, usually with the car itself.
Valuable assets back secured loans. The collateral for purchase, such as a house or a car, can be utilized. Ownership of the deed or title remains with the lender until the loan is repaid in full. Other objects may also be used as collateral for loans. Some common examples include stocks, bonds, and personal property.
Borrowing large amounts of money is often done through secured loans. A lender will typically only lend a substantial sum of money if they have some way to retrieve funds should the borrower default.
Secured loans can be used for new and used item purchases. Home equity loans or home equity lines of credit are other secured loan options. Equity in a home is calculated by deducting the current value from the amount owed. You can use your home as collateral for these loans.
As a secured loan borrower, you guarantee repayment of at least a portion of the loan via the collateral. A secured loan default means the lender will sell your collateral to cover the loan.
What Is an Unsecured Loan?
Because there is no asset to reclaim in the event of default, lenders incur a more significant risk by issuing unsecured loans.
Consequently, interest rates are typically higher, and borrowers must meet more stringent requirements.
Unsecured lenders must have confidence that you are financially capable of repaying the loan. You will be evaluated based on the five C’s of credit.
- Character – Factors such as credit score, employment history, and references
- Capacity – Current income and debt
- Capital – Assets held in an investment account or savings account
- Collateral – Personal assets offered as security, such as a home or automobile
- Conditions – The loan’s terms
A borrower’s ability to repay a debt is assessed using these factors, including the borrower’s situation and general economic factors.
TIP: It is important to note that personal loans differ from business loans in their five C’s of credit.
Secured vs Unsecured Auto Loan: The Differences
The main differentiator between secure and unsecured auto loans is whether collateral is required.
A secured loan uses the car as collateral, and the lender can repossess it if the borrower defaults. However, for unsecured auto loans, the car isn’t considered collateral. Some lenders require a co-signer instead of collateral or a person who guarantees to take over your loan payments if you default.
Interest rates are also typically higher for unsecured loans, and borrowers must meet more rigorous eligibility requirements.
Benefits of a Secured Auto Loan
Here are some benefits of a secured auto loan to consider.
- Larger loans are possible because lenders have more confidence they will be paid back, whether by paying back the loan or selling the property.
- Because the lender takes on less financial risk, secured loans often have lower interest rates than unsecured loans.
- Some secured loans, such as mortgages and home equity loans, allow qualifying persons to deduct the interest paid on loan each year from their taxes.
Benefits of an Unsecured Auto Loan
Here are some of the benefits of an unsecured loan to consider.
- Even if you don’t have any property to put up as collateral, you might be able to acquire an unsecured loan.
- No risk of repossession if you default on the loan.
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Secured vs Unsecured Auto Loan: Interest Rates
Personal loans with no collateral generally have higher interest rates than those with collateral. This is because unsecured loans are seen as riskier by lenders. The lender may be concerned that you’ll be less likely to repay the loan if you don’t have collateral. Therefore, a higher rate for you signifies a higher risk for your lender.
Interest rates for secured auto loans have a vast range depending on your credit, term length, and whether you’re buying new or used.
Unsecured auto loans will be more difficult to find, being as most car loans are secured, but you can be assured that the interest rate will be higher than the range described above in most cases. You’ll also need to be a well-qualified applicant.
Also Read: Should You Use a Personal Loan to Buy a Car?
Deciding Which Kind of Auto Loan Is Right for You
Shop around, apply for prequalification for a few loans, and compare the offers you receive from different lenders to determine which lender and loan are ideal for your circumstances. Rates and terms vary widely, so looking around may help you locate a lower interest rate or fees, saving you money and allowing you to pay off your loan faster.
If you have a savings account, CD, or other assets that your lender will take as collateral, you should consider applying for a secured loan since your interest rate and APR will almost certainly be cheaper.
Almost always, the easiest and cheapest option will be to get a secured loan using the vehicle as collateral.
Getting an unsecured loan is an option if you don’t have an asset that your lender may accept or don’t want to risk losing the assets you possess. However, know upfront that you’ll be paying more in interest, and you’ll need to be highly qualified.
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Your financial situation will likely be the most significant determinant of which option you choose.
Secured loans usually feature lower interest rates because your assets are used to secure the loan. However, as unsecured loans are not guaranteed by collateral, their interest rates are higher.
Pay attention to the interest rate, repayment time, and monthly payment amount, regardless of the loan type.
The simplest option will be a secured loan using the vehicle as collateral, and as long as you make your payments, you shouldn’t have anything to worry about.