When it comes to buying a new or used car, you may need to find financing in the form of a car loan. An auto loan is a personal loan that you use to purchase a vehicle. You will pay the principal amount and the interest on it over a fixed period, usually between 1 and 7 years.
When you look at auto loans, you might be wondering if it is secured or unsecured debt; well, it can be either. Choosing the right loan that offers a reasonable interest rate and other features can save you a ton of money in interest and fees.
Secured or unsecured auto loans
When shopping for auto loans, it is important to understand whether the auto loans are secured or unsecured debt. The answer is they can be both, so check what type of debt your lender is offering you.
A car loan can be a secured debt or a “secured loan”. A secured loan involves offering an asset, such as a car, as collateral for the loan. If you cannot repay the loan, the lender can take possession of the vehicle and sell it in an attempt to recover some of the money you owe. This gives the lender some security and financial protection in case you are unable to repay. If your car is repossessed and sold for less than what you owe the lender, you will have to pay the lender for the shortfall.
An auto loan can also be unsecured debt. An unsecured loan has no assets that serve as collateral for the loan. If you can’t repay the loan, the lender will need to get a court order before taking your assets and selling them to pay off the outstanding loan amount. Unsecured loans pose a greater risk for lenders, so they are generally more difficult to obtain.
The difference between secured and unsecured auto loans
Here is a quick and easy comparison that highlights the difference between secured and unsecured auto loans:
|Guaranteed auto loans||Unsecured auto loans|
|Your car will serve as collateral for the loan.||Your car is not pledged as collateral for the loan.|
|Lenders generally offer secured auto loans for the purchase of new vehicles.||Unsecured auto loans are generally available for used cars.|
|The lender can recover the unpaid amount by repossessing your car and selling it.||There is no underlying security asset, so there is no threat of repossession.|
|Secured auto loans tend to have a higher loan amount and a lower interest rate.||Unsecured auto loans tend to have a reduced loan amount and a higher rate of interest.|
What else to consider about secured auto loans
If you are considering buying a used car, it is important to remember that the previous owner may have used it as collateral for a car loan. If this loan is still not repaid, the lender can repossess the car even if you just bought it.
To prevent this from happening, you need to do your due diligence before purchasing a car. The seller or the previous owner cannot divulge this information.
You can check the Personal Property Security Register (PPSR) to see if the car has ever been purchased through a loan or is currently being used as collateral. The PPSR is a national registry for personal property over $ 5,000, including cars. You will have to pay a fee to check the registry, but it will be able to show you if there are any loans currently holding the car as collateral and you can perform this check at any time.