If you’re taking out a loan for the purpose of purchasing a car, there are a number of factors you need to consider. One of them is whether your borrowing is secured or unsecured.
Secured vs. unsecured
Car loans can be secured or unsecured, depending on the particulars of the plan you take out. When taking out car finance, your loan provider should tell you whether or not your loan is secured or unsecured. The main difference lies in the fact that the car will be used as security for a secured loan. This makes for less risk to the lender. Unsecured loans tend to have higher interest rates, to reflect the increased risk to the lender.
In the case of a secured car loan, the lender uses the car as security against you being unable to pay back the loan. The lower risk often means that lower interest rates will be available for secured loans, in comparison to their unsecured counterparts.
The risk of a secured car loan is higher to the consumer, because the lender can take possession of the car if you fall behind with loan repayments.
The main benefit of a secured loan is that you are far more likely to access better rates of interest. However, these rates may be variable. It’s advisable to check very carefully, as you could end up paying more per month than when you started out if rates increase during the term.
The key disadvantage of a secured car loan is the risk of losing the car if you cannot keep up with repayments, as well as the fact that you do not truly own the vehicle until the loan is cleared.
An unsecured loan is simpler. You borrow the loan amount from the lender, and pay back regular sums, usually each month, until the sum borrowed is repaid in full.
Unsecured loans are more risky for lenders, as they do not have the security of an asset to fall back on if you fail to make repayments. This increased risk means that interest rates for unsecured loans tend to be higher than those for secured loans.
There are additional risks to the borrower as well as the lender. Additional charges may be applied for late payment, or if you do not make payment at all. This sort of circumstance can harm your credit score, meaning that future borrowing could be more restricted, or even denied. If your credit rating falls, you are also likely to have to pay higher rates of interest on any future loans, including mortgages.
If necessary, the lender of an unsecured loan can take the case to court in an attempt to recoup their money. This could lead to demands being made on other borrowing, such as your home loan.
Finding the right loan
Taking some simple steps can help you get a suitable loan:
Check with your mortgage lender
If you are a homeowner, it’s a good idea to consult your mortgage lender regarding what they might be willing to lend you and on what terms. As they are familiar with your repayment record, they may be more willing to offer the best rates of interest and better terms.
Check what else is out there
Have a look at what other deals are available before you sign up to anything. You can do this quickly and easily using comparison sites, but bear in mind that this will not give the full picture, as some lenders may not be listed.
Protect your credit rating
If you are shopping around, check first that any trial applications will not affect your credit score. Sometimes lenders do a credit check before they even give a quote. This can make it seem like you have applied for a lot of loans, which in turn can have a detrimental effect on your credit rating. Request a ‘quotation search’ instead, as this will not appear on your credit file.