Should You Get a Secured or Unsecured Car Loan? What You Need to Know

Buying a new or used car is an exciting experience. But it also involves a lot of big financial decisions like how you’ll finance your vehicle purchase. One of the first choices you’ll face is whether to get a secured or unsecured car loan.

Both loan types have pros and cons. In this comprehensive guide, we’ll explain what secured and unsecured auto loans are, how they work, and the key differences between them. We’ll also provide tips on factors to consider when deciding which type of car loan is best for you.

What Is a Secured Car Loan?

A secured car loan uses your new vehicle as collateral for the loan. The lender files a lien against the title so if you default on the loan they can repossess the car and sell it to recoup their losses.

Since your new wheels are backing the loan, secured auto loans come with lower interest rates, typically between 3-7%. They also have more flexible repayment terms up to 84 months. This makes the monthly payments more affordable.

Secured car loans are easier to qualify for since the lender faces less risk. They mainly check your credit score income, and existing debts when approving your application. Scores above 650 typically qualify for secured financing.

Almost all car loans from dealerships are secured. Many banks and credit unions also offer secured auto financing.

What Is an Unsecured Car Loan?

An unsecured car loan is not backed by the vehicle as collateral. Instead, it’s essentially a personal loan used to purchase a car. Since your ride isn’t guaranteeing the debt, lenders face more risk if you default.

The most common type of unsecured car loan is a personal loan from an online lender like Lightstream or Upgrade. Some banks also offer personal installment loans, but usually at lower amounts like $5,000 – $20,000.

Without collateral, lenders need to mitigate their risk by charging higher interest rates, typically 10-16% for unsecured car loans. The repayment term is also shorter, around 36-60 months. This results in larger monthly payments.

To qualify for an unsecured auto loan, you’ll need good or excellent credit – scores of 680+ are generally required. The lender will thoroughly verify your income, debts, and credit history before approving an unsecured loan.

Unsecured financing can also come from family or friends lending you money to buy a vehicle. There’s risk here, too, so approach these informal loans carefully.

Key Differences Between Secured and Unsecured Car Loans

Now that you understand the basics of each type, here are some key differences between secured and unsecured auto loans:

• Interest rates – Secured loans have lower rates, while unsecured rates are higher.

• Qualification – Unsecured loans require higher credit scores and rigorous verification. Secured loans have easier standards.

• Term length – Secured loans offer longer repayment terms up to 84 months. Unsecured loans have shorter terms of 36-60 months.

• Monthly payments – The longer terms of secured loans mean lower monthly payments. Unsecured loans have higher monthly payments.

• Collateral – Secured loans use the vehicle as collateral. Unsecured loans have no collateral.

• Repo risk – Your car can be repossessed if you default on a secured loan. There’s no repo risk with unsecured loans.

• Auto insurance – Lenders require comprehensive/collision coverage on secured loans to protect their asset. Those coverages are optional with unsecured loans.

Pros of Secured Car Loans

Secured auto loans have advantages that make them attractive to many buyers:

• Lower interest rates – Secured loan rates are typically 3-7%, much less than unsecured loan rates. This saves you a lot of money over the loan term.

• Longer repayment terms – Secured loans let you stretch payments from 12-84 months. This keeps the monthly payment affordable.

• Easier to qualify – Approval is easier for secured loans since your vehicle secures the debt. Minimum score requirements are around 650.

• Buy from dealerships – Most dealers only offer secured financing since it’s lower risk. Unsecured loans require buying from a private seller.

• Promotional financing – Specials like 0% APR for up to 72 months are only available with secured loans.

So if you want lower rates, flexible terms, and easier approval, a secured car loan likely the better option. The collateral requirement is a tradeoff some buyers are willing to accept.

Pros of Unsecured Car Loans

Unsecured auto loans also have some advantages that may appeal to certain borrowers:

• No collateral – Your car can’t be repossessed if you default on an unsecured loan. This gives some buyers peace of mind.

• Buy privately – Unsecured loans allow you to purchase from private sellers since the lender isn’t filing a lien. This provides more selection.

• No extra insurance – You aren’t required to carry comprehensive/collision coverage on an unsecured loan, saving money on premiums.

• Pay off early – Unsecured loans can typically be paid off at any time without prepayment penalties. This allows faster debt repayment.

• Credit building – Making on-time unsecured loan payments can help build/rebuild your credit. This benefit is limited with secured loans.

For borrowers who value no repo risk, buying privately, saving on insurance, flexibility, and credit building, an unsecured car loan may be the smarter choice.

Factors to Consider Before Choosing a Car Loan Type

When deciding between secured and unsecured auto financing, there are a few key factors you should consider:

Your budget – Can you afford the higher interest rate and monthly payment of an unsecured loan? Or is a lower-rate secured loan a better fit? Crunch the numbers to see the total and monthly costs for both.

Your credit – What’s your current credit score? That plays a big role in qualifying for unsecured loans. Under 680 will likely require secured financing.

Down payment – Secured loans often need 10-20% down to get approved. Unsecured loans allow buying 100% on credit but have much higher rates.

Your risk tolerance – Are you comfortable with the repo and insurance requirements of a secured loan? Or do you prefer the flexibility and no collateral aspect of unsecured financing?

Loan term needed – Do you need a longer secured loan term like 72-84 months to afford the monthly payment? Or can you handle the shorter term of an unsecured loan?

Buying timeline – Unsecured loan funds take 1-7 days to receive. Secured loans are funded when you finalize the sale, so they may better fit a quicker buying timeline.

Considering these factors will help you determine if a secured or unsecured car loan aligns better with your financial situation and preferences.

Tips for Getting the Best Car Loan Rates

Whether you choose secured or unsecured financing, here are some tips for scoring the lowest interest rate possible:

• Check your credit – Good credit secures better rates. Address any mistakes on your reports and pay down balances before applying.

• Shop lenders – Compare loan quotes from banks, credit unions, and online lenders. Rates can vary significantly between lenders.

• Raise your down payment – Putting 20% or more down shows lenders you’re financially stable. This can help qualify for the best rates.

• Shorten the loan term – Opt for a 36 or 48 month repayment if possible. The longer the term, the higher the rate.

• Enroll in autopay – Agreeing to automated payments from your checking account can lower your interest rate.

• Bring a co-signer – Adding a cosigner with good credit may help you qualify for a lower rate. Just know they are equally responsible for repaying the loan.

• Improve your credit first – Delaying your purchase to raise your score can mean better loan terms. Pay down debts and continue making on-time payments.

Using these strategies can potentially save you thousands of dollars in interest charges. With a little work, you can lock in the most competitive secured or unsecured car loan rate for your situation.

The Bottom Line

Secured loans are the most common way to finance a car with lower rates and predictable terms. But unsecured loans offer more flexibility and freedom for buyers who qualify.

Think about your budget, credit, down payment, risk factors, loan term needs, and buying timeline when deciding between the two options. And shop multiple lenders to find the most competitive rate once you choose the best loan type for you.

With this advice, you can make an informed financing decision and get the wheels you want at a monthly cost you can easily afford. Just take your time weighing the pros and cons of secured vs. unsecured. Focus on finding the loan structure that best fits your financial circumstances.