Use your car as collateral and benefit from lower interest rates.
Find out what you need to know about secured car loans in this guide.
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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.
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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.
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|
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?
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.