When applying for car loans, borrowers are often making difficult decisions. One of these decisions is choosing a secured car loan or an unsecured car loan. Both loans have their advantages and disadvantages, which must be understood before making any decision. To make the right choice, car loan applicants should know the difference between secured and unsecured car loans.
Secured Car Loans
Secured loans are taken against an asset of the borrower, which can be a house, a boat, land, or a stock. The asset is referred to as collateral and will serve as a security for the bank or lender from possible financial loss. In most car loans, the car to be purchased is used as a collateral.
With secured car loans, the lenders have the right to seize the collateral if the borrowers fail to repay the car loan. The lenders will then sell the collateral to recover the loss from the unpaid loan. However, the collateral is not just beneficial to the lenders, but also to the borrowers.
By taking the car loan approval against an asset, the borrowers are providing less risk to the lenders that the loan will not be paid. Thus, most secured car loans have lower interest rates. Aside from that, secured car loans usually have fixed interest rates, which means that borrowers will have the same monthly repayments for the entire loan term.
Unsecured Car Loans
When giving out unsecured car loans, lenders do not require the borrowers to provide a collateral. In which case, they have no guarantee to recover the money if the borrower fails to repay the car loan. With an unsecured car loan, the risk is much higher for the lenders.
That is why lenders give out most unsecured car loans with the higher interest rate. It will compensate for the high risk of lending without security against financial loss. Also, lenders usually approve an unsecured car loan for vehicles with lower value or second-hand cars only. Unsecured car loans are available in fixed or variable interest rates.
Which one is better?
The type of car loan that you need to choose should depend on the borrowers’ financial capability. If you plan to get a car loan, you must assess your financials first. Secured car loans are an ideal choice due to low-interest rates. However, most lenders only offer this type of loan for the purchase of new vehicles, which is more expensive compared to second-hand cars. If your budget can’t afford a new car, then it’s more practical to get an unsecured car loan.
Whichever you choose, make sure to look at both secured and unsecured car loans so you are prepared to make a decision when the time comes. When it comes to car loans, one of the most reliable sources is We Are Loans. We can help you find the lowest rate for your car loan application with our experienced finance professionals.
Call us on 1300 935 626 and get one of the best car loan deals in Australia.