Secured Auto Loans
Secured auto loans are those that require an asset be put up as collateral in order for the money to be distributed. They differ from unsecured auto loans which do not require such collateral. The difference between the two is, of course, the asset that “secures” the loan. Because a borrower puts up something of theirs as collateral on the loan, they have more of an incentive to pay the loan regularly and not default. In many cases where auto loans are concerned, the collateral of a secured loan is the purchased car itself.
Benefits of a Secured Auto Loan
Since the borrower risks a personal asset in the process, they are more likely to honor the requirements of a secured auto loan. For this reason, secured auto loans typically come with lower interest rates. High interest rates are a reflection of the risk a borrower poses to the lender. Those considered at higher risk of default receive a higher interest rate to compensate. Having a secured asset as collateral mitigates a large part of the risk, hence the lower interest rate.
A lender may also agree to lend more money to a borrower with a secured auto loan. If the borrower defaults, they forfeit their asset which could be the car itself, a title to a different car or something else.
The primary disadvantage of a secured auto loan is that the borrower may lose their asset if, for any reason, they cannot make payments on the loan. If they stop making the auto loan payments and the new car itself was used as collateral, it will be repossessed.
For a lower interest rate and possibly a larger principal sum, consider a secured auto loan. Although you will be required to put something up as collateral, if you are a responsible borrower, this loan type will benefit you.