Auto loans tend to be secured on the car you buy with it but they aren’t your only option to buy a vehicle. You could also use an unsecured personal loan to buy it too. We asked out auto loans team to outline the pros and cons of secured vs unsecured loans.
The main difference of secured loans vs unsecured loans is that secured are a loan backed by an asset. That means your car is used as security for that loan. It isn’t yours until you have fully paid the loan and if you default, you can lose your car.
This does have an upside though. As a secured loan means less risk for the lender, they will often give you much lower interest rates, which has obvious benefits.
It’s only in extreme circumstances that a lender would repossess a car through defaulting on an auto loan but it does happen.
Unsecured loans are loans not secured on an asset. They are based on your personal circumstances, credit score and financial situation.
As the lender assumes more risk by not securing the loan on the car, you’ll pay a higher rate of interest on your loan. You may be limited in how much you can borrow and over how long too, depending on who you borrow from.
You do own the car and a lender would need to go through the courts to seize assets in the event of a default though.
Pros of Secured Loans
Pros of secured loans include:
- Lower interest rates than unsecured loans
- Lower monthly payments thanks to those lower rates
- Easier to be approved for secured loans
- Can borrow more with a secured loan
Cons of Secured Loans
Cons of secured loans include:
- The car can be repossessed if you default on the loan
- More paperwork on the car is required (usually handled by the dealer)
- Some secured loans have early settlement fees
Pros of Unsecured Loans
Pros of unsecured loans include:
- Lender cannot repossess the car unless they apply through the courts to seize assets
- You can use your bank or other institution to borrow money
Cons of Unsecured Loans
Cons of unsecured loans include:
- Higher interest rates than secured loans because of the extra risk
- Higher monthly payments
- Shorter terms, longest is typically 60 months
- Will often need to borrow less
- Harder to qualify for an unsecured loan
Secured vs Unsecured Car Loans
As far as cars are concerned, a secured loan makes more sense than an unsecured loan. While your car may be at risk if you don’t make payments, your credit score and financial wellbeing is at risk regardless of whether the loan is secured or unsecured.
Secured loans let you borrow more, for longer, at lower rates. When it comes to auto loans, that makes a lot more sense.
We hope this article helped give you a better idea of secured vs unsecured car loans. For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today!