Secured auto loans operate by using the purchased vehicle as collateral, which is the standard option available in the market. Many financial institutions, including banks, credit unions, online lenders, and dealerships, exclusively provide secured car loans. This practice serves to maintain competitive interest rates and minimize the lender’s exposure to risk.
Advantages of Secured Car Loans
These include the chance for lower interest rates and the ability to finance higher-priced vehicles. Since secured auto loans are the common choice for purchasing cars, they are readily accessible compared to unsecured alternatives.
Secured auto loans often allow borrowers to secure larger loan amounts, typically ranging from 110 percent to 125 percent of the vehicle’s value. This feature lets buyers include additional expenses like gap insurance or extended warranties without requiring out-of-pocket payments. However, the specific loan amount you can obtain depends on factors such as your income and existing debts. Generally, secured loans can cover the costs of more expensive vehicles.
On the other hand, unsecured auto loans are essentially personal loans utilized for buying cars. These loans typically have maximum limits of around $50,000, with some personal loans having lower caps, usually ranging from $25,000 to $35,000. This imposes restrictions on the total amount you can allocate for purchasing a car.
Given that the average financing amount for new vehicles at the beginning of 2023 is $40,851 and $26,420 for used cars, securing an unsecured loan that covers these expenses may prove challenging. While it may be possible for used cars, acquiring full funding for a new car, especially with additional features and enhancements, can be difficult for most borrowers.
Secured Loans Offer Easier Qualification as Another Benefit
In addition to evaluating your credit score, income, and debt-to-income ratio, lenders consider the vehicle’s value that you intend to purchase. As the car serves as collateral, you might qualify for a loan even with a less-than-ideal credit score. Opting for a secured loan can be advantageous for individuals with less favorable credit histories since lenders face reduced risk due to the collateral.
In conclusion, most borrowers typically opt for secured auto loans as their primary choice. While unsecured loans may have specific use cases, selecting a secured auto loan is often the more favorable decision. It is smart to carry out a thorough comparison of different lenders to secure the most advantageous deal when purchasing your vehicle.
