When you want to purchase a car using a loan, you might need to consider the type of loan that fits your budget. Secured loans can be your option to buy a car. But, what is a secured auto loan? Aren’t you familiar with it? Worry not, we’ll explain everything about this secured loan program in this article. Take a look closer!
What is a Secured Auto Loan?
The word “secure” in a secured auto loan means that if you can’t pay your loans, the lender has a right to take away an item of value. This method will help to reduce the lenders’ risks and keep the rates competitive. Moreover, secured auto loans are suitable for people with bad credit or no credit history.
Aside from the fact that the lender will take your car if you default, the secured auto loan is a good deal. This auto loan usually offers a lower rate and a reasonable term length. Additionally, the application process is relatively quick. Therefore, you can qualify for the requirement as soon as possible.
How Does It Work?
Related to the “What is a secured auto loan” question, you may want to know how it works. For this kind of auto loan, you will need a guaranteed item called “collateral”, which is usually the car itself.
You’ll need this collateral as the guarantee item to your lender. If you can’t pay off your debt, the lender will repossess the collateral and sell it to recoup a loss.
Aside from collateral items, how a secured auto loan works is similar to other auto loans. You can find secured loans at the majority of banks, credit unions, and online lenders that provide secured auto loans. But the requirements might be different for each lender, so make sure to shop around to find your ideal loan.
What is a Secured Auto Loan and an Unsecured Auto Loan Difference?
When we talk about a secured auto loan, there’s also an unsecured auto loan. These two types of auto loans have several differences. As you know, a secured auto loan needs collateral as the lenders’ risk prevention.
On the other hand, an unsecured auto loan doesn’t require collateral. It means the loan is a high risk for the lender. Therefore, if you default, the lender can’t seize your car.
However, unlike secured auto loans, unsecured loans usually have high interest rates, small amounts of loans, and short loan terms. Moreover, you must have good credit to make an unsecured auto loan. Therefore, the application process for unsecured loans is daunting if you have a bad credit history.
In short, an unsecured auto loan fits you if you search for a small loan and a shorter term. This loan allows you to keep your car even if you default. Still, you must be careful if the lender takes legal action or your debt to a debt collection agency.
You must have good credit to claim the loan. Furthermore, the interest rates of unsecured loans are typically higher than secured loans.
Meanwhile, a secured auto loan fits you if you have bad credit or need a larger loan. It has small interest rates and a longer loan term. There’s also the possibility of repossession if you fail to pay.
The Benefits and Drawbacks of Secured Auto Loans
After you know the answer to “What is a secured auto loan?”, there are some benefits and drawbacks of secured auto loans you might need to consider before you buy.
1. Advantages
The list below is the benefits of secured loans.
a. Easy to Qualify
One of the benefits of secured loans is that it’s easy to qualify for. Besides your credit score, credit-to-income ratio, and income, the lender will also consider the value of the car you want to buy.
The car’s value is the crucial aspect of qualifying for your loan. Because the lender has your car as the collateral, you might be eligible to qualify for a secured auto loan.
b. Low Interest Rate
The lenders of secured auto loans tend to offer low interest rates compared to unsecured auto loans. If you buy a new car, the average interest rate is 6.58%. Meanwhile, if you buy a used car, the average interest rate is 11.17%.
On the contrary, an unsecured loan has more expensive interest rates. The average rate for a new car is 11.27%, while for a used car, there is no significant change. Still, the secured auto loans tend to have more competitive interest rates.
c. Larger Loan Amounts
Another great thing about secured loans is that they allow you to borrow a larger loan. When you purchase a secured loan, the lender will finance around 110%-125% of the car’s value.
Further, it allows you to buy other expenses, like gap insurance or an extra warranty. Also, keep in mind that the amount of the loan you can borrow depends on your income and other debts.
2. Disadvantages
Although a secured auto loan might be a great option to buy a car, you might have to consider these possible drawbacks:
a. Vehicle Restrictions and Less Flexibility
To secure the car, the lenders sometimes set the mileage and age limits on the vehicle. Although the secured loans give you many benefits, you can only use the money for the expenses related to the vehicle.
b. Collateral Repossession
The worst case if you can’t pay your loan is that the lender will seize your car. While for unsecured loans, the lenders won’t take your car away, even if you default.
Tips Before Purchasing a Secured Auto Loan
After knowing the answer to “What is a secured auto loan?”, are you interested in purchasing this loan? Before you qualify for this loan, there are several things you need to consider.
1. Check Your Credit Score
You can be eligible to qualify for secured loans. Still, your credit score can influence the amount of loan and the interest rate you get. If you have bad credit, consider improving it before applying for loans.
2. Shop Around
Every lender might have different requirements for a secured loan. Make sure to compare each lender to find your ideal loan. You may compare their qualifications, interest rates, term length, and the penalties if you default.
3. Get the Pre Approved for Auto Loans
Once you get your ideal lender, consider applying for a pre approved auto loan. You will know the estimated interest rate, loan amount, and the term length you will get with a pre approved auto loan. This preapproval for an auto loan allows you to negotiate at the dealership more clearly.
4. Find the Car and Finalize Your Loan
After you get the financing offers and a maximum car price, you can find the car. However, be sure that the vehicle you buy matches the lender’s requirements.
Once you decide on the auto loan, always check the contract. Read whether there is any hidden fee, penalties, or additional requirement you didn’t ask before signing the contract.
Have You Understood “What is a Secured Loan?”
Now you know the answer to the question of what is a secured loan. Are you interested in purchasing a secured auto loan? If you have not-so-great credit, then this auto loan is for you.
Furthermore, this loan is also suitable if you want to buy a more pricey car since the loan has a lower rate and long-term to pay. However, since the lender can seize your car if you default, be careful when paying off the debt.
