• Advantages and Disadvantages of Secured Auto Loans

    Many customers who are looking at financing a car or truck may want to consider secured auto loans as one option among many that they can choose to tailor their financing needs to their specific financial situations. Secured auto loans are loan agreements that use existing assets as collateral. These kinds of car loan options include car title loans and auto loans involving a home equity loan or HELOC (home equity line of credit). Here are some of the advantages and disadvantages of secured auto loans.


    • Less Credit and Income Requirements – With many secured auto loans, customers are able to bypass a lot of the restrictions that accompany credit-based loans. When credit is all you have, a lender scrutinizes you and is generally wary of investing in your debt. With collateral, the lender is much more likely to grant you a loan regardless of your current income or credit situation, simply because the loan is secured using that collateral.
    • Quick Loans – Secured auto loans also generally include less red tape and risk assessment. For those who need to get money right away, and believe that they can pay it back over time, a secured auto loan can be the way to go. It can save lenders and borrowers a lot of headaches by cutting through the insecurity over whether someone is “good for the money” by presenting the collateral, which is a traditional safeguard to any kind of personal loan.


    • Assets May Be Vulnerable to Seizure – Those who sign secured auto loan agreements should realize that they are putting their assets up on the proverbial block if they default on payment. This applies to home equity loans, where a home can be seized in a type of foreclosure situation, or loans on existing vehicles, where the collateral vehicle can be repossessed in order to pay off a loan that is in default. Because of this, some customers don’t like the secured auto loan situation, and prefer a loan that uses their credit score for risk assessment.
    • Bad Loan Terms – A very common thing to watch out for in secured auto loan agreements is short payback terms, with very high interest rates tacked onto successive repayment periods. This is especially common in auto title loans, also called auto pawn loans. In this kind of secured auto loan situation, a borrower may only have a month or two to pay back a large sum, after which the interest spikes and the debt grows rapidly. Stay away from these kinds of lessons to avoid getting caught in a debt spiral.

    The above illustrates some of the possible benefits and drawbacks of a secured auto loan situation for financing a car or truck. When looking at financing options, including those offered by a dealership, and others administered by a third party, like a bank or credit union, always make sure you can handle what you are signing. The negative results of an excessive auto loan can be a permanent struggle for those who miscalculate. Because lenders may not always have the best interests of a borrower in mind, it’s critical to be vigilant about taking on debt that a family knows that they can handle in the long term.