Secured Car Loans Pros and Cons

Financing a car purchase through a car title loan is a common choice. Secured car loans may be used to purchase both new and used vehicles, and can be obtained through banks, car dealerships and loan brokers. Buying a new car can be an exciting experience but it pays to be aware of the pros and cons of using a secured car loan, even if a secured loan is the only available option.

Secured car loans are generally available to most car buyers, regardless of credit status. They offer flexible repayment terms. Buyers can choose to spread the repayments over a longer period than an unsecured loan offers, thus ensuring that payments are affordable. Security must be provided to the lender in the form of collateral, with the most popular option being to offer the vehicle being purchased as collateral. However by doing so the lender retains the car title, and is legally allowed to recover the vehicle if the loan goes into default.

The advantages of secured car loans are they can be helpful for people who have no credit history, as they can establish a credit record by making timely repayments on the loan; whilst those with poor credit history can use the loans to re-establish credit. It is also possible for those with no or poor credit to obtain secured loans without the necessity of a co-signer to stand as guarantor for the loan.

Car loans enable people who cannot afford to purchase a car outright the opportunity to buy one without the necessity of saving for the purchase. As collateral is provided as security then interest rates are usually lower than those available with unsecured loans.

The downside of secured car loans is they are easy to obtain without borrowers always understanding the details involved. As the lender retains the car title the buyer is obliged to maintain the vehicle in good condition to protect the lenders interest. By opting for a longer repayment period borrowers will pay more in interest over the long term. The best solution is to make a good down payment and opt for the shortest term affordable, due to the depreciation of the vehicle. Without considering depreciation the buyer can end up paying a loan which costs more than the value of the car.

Buyers should also be aware of any additional fees and penalties attached to a secured car loan. These are often added to the value of the loan thus incur additional interest. As it is easy to be approved for a secured loan buyers should also consider that monthly payments which appear affordable do not include auto insurance.

The biggest drawback to secured car loans is the risk which comes with providing the vehicle itself as security. Lenders are legally allowed to seize the vehicle without notice if the loan goes into default. Lenders can then sell the vehicle in a commercially reasonable manner, which means they are not obliged to find the best possible price.

If there is any difference owing between the monies raised through a repossessed sale and the outstanding balance of the loan, plus costs incurred by the creditor in recovering and selling the vehicle, the borrower is liable. The lender can obtain a deficiency judgment in most states to pursue the borrower for their liability. This will leave the borrower with no vehicle and an outstanding debt which must still be paid. A car repossession leaves a nasty mark on credit reports which remains for seven years.

Secured car loans can be useful tools to purchase a vehicle but it is important to understand the risks involved. Making a substantial down payment and ensuring that monthly repayments including fees are affordable, is the safest way of using them. Particular attention should be given to ensure all payments are made in a timely manner as this is beneficial to credit histories, whilst failure to maintain payments can lead to repossession. Being aware of the pros and cons of secured car loans leads to a more informed decision when considering purchasing options.

Source: cars direct