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Secured Vs. Unsecured Car Loans: What's The Difference?

Secured Vs. Unsecured Car Loans: What's The Difference?

The vast majority of auto loans are secured loans. That means they are secured on the car you buy with it. But what’s the difference between a secured loan and an unsecured car loan? Which is best when buying a new car?


This article covers what both secured & unsecured loans are and the major differences between both. Let's dive right in.

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What is a Secured Car Loan?

A secured loan is backed by an asset. That means the loan is secured on the car you buy with it. While you own the car, you don’t technically fully own it until the entire loan is paid off.


Should you default on the loan, the lender can apply to the court to repossess the car in lieu of payment. This is an extreme circumstance and doesn’t happen all that often, but it is something you need to be aware of when taking out a secured loan.


The benefits of a secured loan are lower interest payments and the fact it’s easier to qualify for a secured loan than an unsecured loan.


The downsides are that your car can be repossessed if you default and some loans have early settlement fees.


What is an  Unsecured Car Loan?

An unsecured loan is not backed by an asset. That means you own the car free and clear and the lender cannot so easily repossess it should you default on payments.


Should you default on an unsecured loan, the lender has to go through the courts to claim the money back or apply for repossession. So, it’s still possible but there are more hoops to jump through.


The benefit of an unsecured loan is that the car is yours free and clear and you can get a loan from any bank or financial institution you like.


The downside of an unsecured loan is that they are harder to qualify for. As the lending decision is based entirely on your financial position and your credit score, it is often harder to borrow the same amount as you would with a secured loan.


Unsecured loans also charge higher interest rates than secured loans and will be more expensive over the term.


Those terms are often shorter too. You can get a car loan for up to 8 years but few personal loans or unsecured loans go for that long.


Secured vs. Unsecured Car Loans

So, which is best, a secured car loan or an unsecured loan?


On balance, we would say a secured loan makes more sense. They charge lower interest so should be cheaper over the term. You can borrow more if you need to over a longer period.


All things that can help you afford the newest cars.


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