When applying for a car loan, you may be faced with the choice of taking out a secured or unsecured loan. This article explains how both types work and highlights their pros and cons so that you can make an informed decision about which is right for you.
A secured loan is one where the borrower puts down collateral to secure the loan. As an example, if you wanted to borrow $30,000 against your car’s value by using it as collateral against the loan, then you would need to make sure that the car was worth at least $30,000 (which might be quite difficult if it’s an old car). If you default on the loan, then the lender will repossess the vehicle to recoup their losses.
An unsecured loan is where no collateral is needed to secure the contract against default. Loans issued by banks are usually unsecured ones. As with secured loans, unsecured loans usually have a set interest rate. There are also personal loans issued by non-bank institutions, which may not require collateral but will involve much higher interest rates than unsecured bank loans due to the riskier nature of these loans.
What should I consider when applying for car finance?
Since there is no such thing as a ‘best’ car loan, it’s important to weigh up the pros and cons of both types before deciding which one is right for you. As a general rule, secured car loans are more cost-effective than unsecured ones, and accompanied by lower interest rates. However, you need to make sure that your car is worth more than the amount of the loan you want to take out.
Whichever type of loan you decide on, it’s important that you shop around for car finance and find a good deal as interest rates vary from one financial institution to another. Before deciding on a particular deal, check the following:
The yearly interest rates are generally fixed for an entire year. This means that if you pay your loan off early, you won’t be able to take advantage of lower rates, so make sure you’ll have enough time to repay it before applying.
There are different types of car loans in terms of how much paperwork is involved. Unsecured loans are easier to apply for as they usually require the least amount of paperwork, with most lenders nowadays offering loan approval in a matter of minutes. On the other hand, secured car loans tend to involve more paperwork, especially if you need to use your car’s VIN number.
Check whether your repayments will include insurance, taxes, and any late fees.
Be sure to double-check your repayment schedule so that you know how much to budget for each month. Check whether the interest rate is fixed or floating (the interest can go up or down). A fixed-rate loan will generally save you money in the long run compared to a floating interest rate, especially if you expect to pay your loan back within a short period of time.