Most car loans require you to use your car as collateral. And there are many benefits, like locking in lower rates, and lower monthly payments. The risk? If you default, you could lose your car.
How does a secured car loan work?
A secured car loan typically has competitive interest rates and allows a buyer to use the car as security for the loan. This appeals to the lender because it can repossess the vehicle if the buyer defaults — alleviating risk. With less risk come lower interest rates.
The car can be new or used — in good condition — and the rates offered for a secured car loan can be fixed or variable.
How are secured car loans different from unsecured loans?
There are several key differences between these two types of loans:
Loan amount flexibility. Secured loan will only cover the amount of the car. Unsecured loans can be more, giving you the option to use the loan however you choose.
Vehicle requirements. Secured car loans often have different guidelines regarding the age and condition of the car. However, unsecured loans can be used to purchase any type of car.
Interest rates. Rates for secured car loans can be more competitive than unsecured loans, especially if you have little or poor credit.
What happens if you default. The lender can repossess and sell your vehicle to recoup its losses. If you default on an unsecured loan the lender has no rights to your vehicle.
Why are car loans always secured with collateral?
Technically, not all car loans are secured with collateral, though that’s the norm. That might be because it already has collateral built into it— you don’t have to get your vehicle appraised to make sure it’s worth what you say it is.
Lenders sometimes prefer secured loans because it poses less risk to them. If you can’t pay back your loan, it can make up for its loss by repossessing and selling your car.
Fixed vs. variable rate secured car loans
Secured car loans can come with either fixed or variable interest rates and it’s important to select the option that best meets your needs.
Let’s look at the difference between them:
Fixed interest rate
Variable interest rate
Pros
Interest rate remains fixed for the duration of the loan
Knowing your payments each month helps you budget
Cons
Additional repayments or repaying the loan early can be subject to a penalty fee
You may be limited to how many additional repayments you can make per year
If interest rates lower in the market, you can’t cash in on those savings
Pros
Interest rates have potential to drop with the market
Repaying the loan early and making additional repayments is typically allowed
Cons
Interest rate may fluctuate throughout the loan term
Budgeting can be difficult if interest rates begin to soar
How to compare different secured car loans
Finding the best secured car loan depends on things like your financial situation and the length of the loan. When shopping around, some other factors you can use to determine the quality of the loan are:
Interest rate and total cost of the loan. The interest rate determines what your repayments are over the loan term. When comparing loans, add the interest and any other fees to get the total cost.
Fees. These can include one-time origination fees and monthly loan service fees.
Loan term. Lenders set specific loan terms to choose from. Terms are usually between one and five for fixed rate loans and one and seven years for variable rate loans. Make sure the lender lets you repay the loan in a period suitable to your budget.
Additional payments. Some lenders offer the ability to make additional payments, while others charge a fee if the loan is paid out earlier than expected. Apply for a loan without these penalties if you think you’ll be paying your debt off early.
Other features. Lenders offer tools to help you manage your loans like discounts for using autopay. Shop around to find features that can be beneficial to your loan.
How much can I borrow with a secured loan?
Secured car loans only cover the cost of the car you’re buying. The bank or lender may offer you preapproval for a certain amount to give you a ballpark figure of what you can spend on a car.
Whether or not you’re able to include additional upfront costs such as insurance and registration in the loan amount will depend on the lender and how much you’ve been approved for.
Pros and cons of secured car loans
Competitive interest rate. Secured loans come with lower interest rates than unsecured loans, helping to keep your payments manageable.
The vehicle doesn’t have to be brand new. Some lenders let you use an older vehicle as security for a loan.
Restricted loan amount. You’ll only be able to use the loan amount to purchase the vehicle.
Risking your vehicle. If you default on your loan you’ll lose your car, so it’s important to only take on a loan you can afford.
Not sure if a secured car loan is right for you?
There are many different types of car loans and some may be better for you than others. Compare the fixed rate personal loan alternatives below.
Buying a new vehicle isn’t the only time you can use your car as collateral for a loan. You can also use it to help you qualify for other personal expenses:
Secured personal loan.General-use personal loans can be backed by anything you own of value as collateral, including your car. These typically come with even more competitive rates and terms than their unsecured cousins.
Title loans. If you have bad credit or need money today, a title loan lets you borrow against your car’s value. You can often get your money in as little as 30 minutes, but they come with such unfavorable rates and terms that a third of title loan borrowers default.
Auto equity loans. Similar to auto title loans, auto equity lenders like Finova Financial offer fast financing backed by the amount you own in your car. The difference is that you don’t need to own your car outright to get approved. These are similar to auto title loans and are high-cost.
Frequently asked questions
Applying for a secured car loan differs between lenders. Many lenders will let you apply online, with some processing your application and sending a response within minutes. You can also apply over the phone or visit lenders in person.
This differs between lenders, but on average you can see loans from one to seven years — five years for fixed interest loans.
The loan amounts differ between lenders, with some offering loans as low as $1,000 and maximums reaching as much as $100,000. Some lenders have no minimum or maximum amount.
There are several options for you to finance your car purchase. You can choose from a range of secured and unsecured personal loans or traditional car loans.
Matt Corke is Finder’s head of publishing ventures. Prior to this he was head of publishing for Australia, New Zealand and emerging markets. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time, he has survived the dot-com crash and countless Google algorithm updates. See full bio
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