How Secured Auto Loans Work

A secured car loan is a loan that uses the car you buy as collateral for the loan. To do this, the lender will keep the title of the car as a repayment guarantee if you cannot repay the loan. Holding the title allows the lender to prevent the car from being sold or traded if the amount does not cover the amount owed, unless the borrower pays the difference.

Secured auto loans typically have terms up to 84 months, longer than most unsecured auto loans. Although the process of obtaining a secured auto loan is similar to the process of obtaining an unsecured loan, it is important to consider the pros and cons.

What is a secured auto loan and how does it work

Secured auto loans are the most common type of auto loan. There are a range of options available, and they tend to be the easiest type of car loan to understand. But not all lenders you come across will offer secured loans and even lenders with different guidelines.

When you take out a secured car loan, you use a specific asset – the car you buy – as collateral for the loan. As mentioned, this means that the lender will retain the title to the car as a repayment guarantee if you cannot repay the loan.

Advantages of guaranteed auto credit

Secured loans can be a good choice if you’re looking for a lower interest rate, longer loan term, or to finance a more expensive vehicle, especially if you plan to keep the car for a while.

Longer loan terms

Secured auto loans typically have terms of up to 84 months, which is much longer than most unsecured loans, whether auto or otherwise. Although a longer loan term means you’ll pay more interest over the term of the loan, it may be worth it if you think you can make additional payments later or need a lower monthly payment.

Easier to qualify

Another benefit of getting a secured loan is that it’s easier to qualify. The lender will look at your credit score, income, and debt ratio. But if you don’t have good credit, a secured loan can be a good option because the lender doesn’t take as much risk when they have collateral.

Lower interest rates

Secured loans are generally offered at lower interest rates than unsecured auto loans. Again, if you don’t have the best credit, this can be a particularly useful advantage when buying a new car.

How to get secure auto credit

The process of obtaining a secured auto loan is similar to that of an unsecured loan. You will need to go through a lender or financial institution and complete an application.

Next, you’ll need to provide information such as your current work history, income, residency, and any debts and savings you have. You should also be prepared for the lender to produce a report to get your credit score.

Also be sure to have your most recent pay stub, personal and vehicle information, bank statements and proof of residency with you. It’s a good idea to calculate your expected interest rate and monthly payment in advance by taking advantage of an auto loan calculator.

If approved, you will sign a loan agreement and the lender will start sending you monthly statements. Get ready to start making your monthly payment from the first month. And if you can, set up autopay to make sure your car payment is always paid on time.

What to consider with secured auto loans

Secured loans can be a good option if you don’t have strong enough credit to qualify for a traditional loan. They are useful for drivers with a low loan amount who want a low interest rate and for those with better credit who want to pay a little more and get a better interest rate.

But these loans come with limitations, including a narrow selection of vehicles to choose from. If you are looking for a specific vehicle, such as a luxury car or an electric model, you may not find it available with a secured loan. Also, you may need to pay more up front to make the loan interest rate competitive.

If you can’t find the exact vehicle you’re looking for with a secured loan, it’s worth exploring unsecured auto loans. These typically have lower interest rates, higher limits, and more flexibility, including the option to finance 100% of the car’s value.

The bottom line

Understanding the basics of secured auto loans will help you make a smarter choice when financing your next vehicle. Depending on the state you live in, a warranty may also be an attractive option when applying for a car loan. Take the time to compare different lenders to make sure you’re getting the best deal.

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