How Secured Car Loans Work

Unless you are in the enviable position of being able to purchase a car with cash, then auto loans are the usual way to obtain funding for both new and used cars. Just as with other loans car loans can be secured or unsecured, with the former usually carrying a lower interest rate dependant on the borrowers credit score.

Secured loans involve collateral being provided as security against the loan. This can be any asset worth as much as the loan value, but it is most usually the car being purchased which is offered as security. Because the loan is secured preferential interest rates will be available to those with good credit histories, and there is usually more choice when it comes to the repayment terms on offer. The loans can be offered over a longer period of time than an unsecured loan, but this means of course that interest is paid for longer and the car will be depreciating in value.

It is better to take a car loan for the shortest possible affordable term and make a large down payment simply due to the fact that the car will lose value. If a secured loan is taken then the car itself is at risk of legal repossession if you default on the loan, thus you would have lost payments made and any equity you had built up in the vehicle would be lost.

However secured loans are the only option for many seeking car finance as lenders prefer to have the security of collateral. It does mean that those who have poor or bad credit are still eligible to obtain car loans but it is likely to be from sub prime lenders, and the interest rates may still be high even though the loan is secured.

If the car is used as security the borrower has an obligation to maintain the vehicle in good repair as it does not of course technically belong to the borrower until the loan has been discharged in full, in just the same way that a house is never for certain ones home until the mortgage is discharged.

Secured loans can be pre approved, giving the borrower the chance to have the finances in place before an offer is made on a vehicle. There is no obligation to use a pre approved loan as the dealer may well offer a loan at better rates.

Secured car loans often offer the most affordable finance option with repayment terms to suit the borrower but always be aware that the vehicle is at risk of repossession with this type of loan. If you have the option you may prefer to pay more interest for a shorter unsecured car loan.