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Secured and Unsecured Car Loans

Written by: Lucas Coggan

Article Overview: Many people are not sure of the difference between secured and unsecured car loans and how that difference affects your finance and their repayments. The difference can vary depending on the bank or finance company, but is bigger when the true cost of each is taken into account.

Secured and Unsecured Car Loans

Many people are not sure of the difference between secured and unsecured car loans and how that difference affects your finance and their repayments. The difference can vary depending on the bank or finance company, but is bigger when the true cost of each is taken into account.

Understanding secured and unsecured car loans in detail can be useful in saving money but, let's first have a look at the a range of workings that determine the cost of your loan and of your monthly repayments. The cost of the car finance package is the total you repay less the amount borrowed. Hence, let's say you are repaying $20,000 at 12% interest rate over 36 months; you will pay back at the rate of $664.29 per month. That would total a repayment of $23,914.44, and the cost of the loan would be $3,914.44 plus any set-up or administration fees. A car loan calculator will make it simple to calculate all these figures online.

An alternative to a car loan package would be commercial hire purchase (HP), where you hire the car over the repayment period and receive the ownership papers to the vehicle with your final payment. Until then the car belongs to the HP company.

However, most loans are either secured or unsecured, and not all lenders offer car loans that are unsecured so let's consider secured loans first. Secured car finance is one whereby the lender offers the loan with the car as security. If you fail to make payments, the lender can sell the car to recoup their money. It could be probable to get a secured car loan if the car is over a certain age, often 7 years, but the finance term could be shorter than 5 yearsor not at all by using your home or some other form of security. These are not exactly classed as car financing. normally the car is used as security over the loan.

If you prefer you can request no deposit car finance and have all on-road costs added to the amount financed. Options like registration , loan insurance and comprehensive auto insurance as part of the financing deal. Loan protection insurance makes sure that the loan is paid off in the event of your death during the loan period, and comprehensive car insurance is needed to make sure that the car is in good condition should it be needed to repay the lend in the event of you defaulting on your loan commitment.

This might all sound like doom and gloom, but these are conditions you see with most secured car loans, not only car loans. You can normally have a secured car loan over one to five years, and the interest rate will be lower than that for an unsecured car finance where the finance company charges extra to compensate for their added risk. As with any loan, a deposit will result in lower payments, or a shorter term, whichever you prefer.

You could also apply a balloon, which is an amount borrowed where you pay interest only and finalised the principle when finalising the loan. This is popular by those whose income will increase over the period, and they will be in a better financial position to pay a lump sum in 3 - 5 years time. This too results in either a lower monthly repayment or a shorter repayment term.

If you are buying a used car, your car loans intererst rates can be priced very differently according to the lender and the age of your car. Many will charge higher loan rates, and the current credit squeeze has changed the outlook of many lenders to unsecured car loans in particular. Many no longer offer unsecured loans due to the increased risk in the current economic climate.

However, they are still available, and some online car finance brokers can assist in getting you a good low rate unsecured car loan. In addition to the car loans interest rates, you should also compare the fees charged, since they can involve a considerable outlay for you before you get the loan.

The main differences between secured and unsecured car finance, therefore, can be summed up as:

Secured finance are cheaper to repay, with normally lower interest rates.

Secured loans demand fully comprehensive car insurance, while unsecured loans do not.

Both finance packages could require death insurance cover for the loan, but secured loans are more likely to.

You can sometimes include insurance, registration and other costs in the secured loan, but with an unsecured car financing you must include the the costs on top of the amount borrowed.

Fees for unsecured auto loans can be considerably higher than for secured car loans.

Not all finance companies will offer unsecured auto loans.

There few doubts that if your car is young enough to be given a loan with the car as security, then that should be your option. You might be able to arrange a secured loan for an older car with your home as security, but you will have to make sure to maintain the repayments since lenders are becoming unsympathetic in the current economic climate.

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Article Tags: car loan calculator, car loans



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