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  • Writer's picturePreston Morris

Is An Auto Loan Secured Or Unsecured Debt?

Updated: Jun 24

Difference Between Secured and Unsecured Auto Loans

Unsecured Auto Loans
Unsecured Auto Loans

Unsecured Auto Loans

An unsecured car loan is a personal loan used to purchase a new or used car. Since the loan is unsecured, the lender cannot repossess your car if you stop making payments. Instead, the lender can report the default to the credit bureaus and sue you.

What is the difference between a secured and unsecured auto loan?

With a secured loan, the lender can take possession of the collateral if you don't repay the loan as you have agreed. A car loan and mortgage are the most common types of secured loan. An unsecured loan is not protected by any collateral. If you default on the loan, the lender can't automatically take your property. Unsecured Auto Loans

Difference Between Secured and Unsecured Car Loans

The main difference between secured and unsecured car loans is if there is an object being used as collateral. In a secured loan, the car serves as collateral and the lender can take the vehicle back if the borrower stops paying. An unsecured loan uses a co-signer instead of collateral. The co-signer is an individual who agrees to take over the loan payments in the event that the borrower stops paying or is no longer able to pay. See the other important differences between secured and unsecured loans below:

Unsecured Auto Loans

  • Typically offer shorter loan terms

  • Can have fixed or variable rates

  • It’s harder to qualify

Secured Auto Loans

  • Longer loan terms

  • Has fixed interest rate

  • Easier to qualify for with poor credit

For Hendersonville drivers who don’t want to risk losing their vehicle, an unsecured auto loan can provide more peace of mind. However, a secured loan might be easier to acquire for drivers who have a poor credit history or no credit history.

Unsecured Car Loan: Pros

If you, the applicant, have these financial assets in your favor, an unsecured car loan can be an excellent option for the following reasons:

  • You may secure your auto loan from any lender, including your bank, credit union, or other lending institutions. You do not rely solely on the dealership for financing.

  • There is no risk of the bank repossessing the car if you fall behind on payments.

  • You receive a check for the loan amount, and you pay directly to the dealership for the vehicle. You then own the car outright.

  • You are eligible to take out a more outstanding loan than what you owe for the vehicle to cover any incidentals and extra accessories for the car.

  • You can shop around for competitive rates because you are not reliant on dealership financing.

Unsecured Car Loans: Cons

There are not many downsides to this type of financing, but there are a few things to take note of if you go this route:

  • Timely payments are necessary to keep your credit intact. However, late payments can incur penalties and damage your credit score.

  • Due to the risky nature of unsecured auto loans, there is a possibility that you will pay a higher interest rate.

  • If you default on the loan, your account goes to a collection agency or small claims court.

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