The basic definition of a secured car loan is a loan with collateral offered in case of default on the loan. Usually, the collateral is the item being purchased. Collateral for a car is the car itself. If loan goes into default, then the car is repossessed by the lender.
Unsecured loans are loans that have no collateral attached. Most personal loans, student loans and credit cards are examples of unsecured loans. If payments are missed and terms of the loan are not met, the only things the lender can do are use a collection agency or sue for the balance owed.
Sometimes, a lender for a car loan will require security beyond the vehicle. This may occur in the case where a borrower has very low income or has particularly poor credit or no credit.
Then it’s up to the borrower to subsequently offer their house, acreage, boat, or other type of property, if the lender asks for more security. Normally, this is taken in the form of a legal document. The lender releases the lien when the conditions of the loan are finished.
If security is asked for by a lender, the lender must be the legal owner of the property offered.
Secured Car Loans Let You Pay Smaller Amounts over a Long Time
Unsecured auto loans are offered by a lending institution on the assumption that the word and reputation of the applicant are solid based on past performance and he or she will make payments on time for the duration of the term. If their credits score is high then they will easily qualify for this type of loan. However, the longest term available for this type of loan is usually 48 months and the rate is usually higher than prime rate sometimes as high as 12 percent.
Secured auto loans generally run between 3 and 5 percent and terms usually go to maximum of 72 months and even as far as 84 months. Secured auto loans are obviously the better choice for deal on a car than an unsecured loan.