We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free – so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.
Buying a car is an exciting milestone in life. However, the process of getting a car loan can be confusing, especially when it comes to understanding the difference between secured and unsecured loans. The good news is that most car loans are secured loans, which provide many advantages to borrowers.
What is a Secured Loan?
A secured loan is a loan that uses collateral to reduce the lender’s risk. Collateral is an asset that the borrower pledges to the lender if they cannot repay the loan.
For a car loan, the vehicle itself serves as collateral The lender places a lien on the car title, meaning they have a legal right to repossess and sell the car if the borrower defaults on the loan
Other common examples of secured loans include mortgages and home equity lines of credit (HELOCs), which use real estate as collateral.
What is an Unsecured Loan?
An unsecured loan does not use any collateral. Instead, the lender must rely solely on the borrower’s creditworthiness when approving the loan.
Examples of unsecured loans include personal loans, student loans and credit cards. If the borrower defaults, the lender cannot repossess anything. They can however, take other legal action like wage garnishment or filing a lawsuit.
Are Car Loans Secured or Unsecured?
The vast majority of car loans are secured loans. It’s rare to find an unsecured auto loan option.
Secured car loans offer many advantages:
-
Larger loan amounts: Lenders may finance 100-125% of the car’s value, allowing you to roll in extras like an extended warranty. Unsecured loans generally cap out at $25,000-$50,000.
-
Lower interest rates: Secured car loan rates can be 1-3% lower than unsecured personal loan rates.
-
Easier approval: The collateral reduces the lender’s risk, increasing approval odds for those with poor credit.
-
Longer terms: Secured car loans can span 72-96 months. Unsecured loans max out at 5 years.
For these reasons, most people elect to get a secured auto loan when purchasing a vehicle.
When Might an Unsecured Car Loan Make Sense?
Unsecured loans aren’t the best fit for most car buyers. However, there are some situations where they could be beneficial:
-
Buying an older used car: Many lenders don’t finance vehicles above 10 years old or with over 100k miles. An unsecured personal loan avoids these restrictions.
-
Custom or classic vehicles: Lenders are wary of modified or classic cars. An unsecured loan provides more flexibility.
-
Immediate funds: Unsecured loans can fund in just 1-3 days once approved. Secured loans take longer due to titling and lien processes.
-
Consolidating debt: Those looking to pay off credit card debt could take out an unsecured personal loan at a lower interest rate.
For most though, a secured car loan is the simplest, most affordable financing option when purchasing a vehicle. The security provided by the collateral makes lenders much more willing to work with all credit ranges.
What is the Loan Process for a Secured Car Loan?
Secured car loans involve a few extra steps compared to unsecured loans:
-
Research: Compare loan terms, rates, fees, and lender reviews as you would with any loan. Credit unions often offer the best auto loan rates.
-
Apply: Complete a car loan application with your personal and financial details. This is often done at the dealership, but you can pre-qualify with lenders beforehand.
-
Get approved: The lender reviews your credit, income, and existing debts to make an approval decision. This usually takes 1-2 days.
-
Provide documentation: Supply documents like proof of income, driver’s license, insurance info, and any required down payment.
-
Finalize contract: Review all terms with the lender. Sign the final loan agreement.
-
Lien placed: The lender places a lien against the vehicle title, registering their security interest.
-
Purchase vehicle: Take possession of the car once financing is secured.
-
Make payments: Repay the loan in monthly installments until the balance is paid off.
The secured structure brings extra steps but provides major benefits to borrowers. As long as you make payments on time, you get to enjoy driving your new car while building credit!
Can a Loan Company Repossess a Car?
Yes, with a secured auto loan, the lender can repossess your car if you default on the loan.
Defaulting means missing multiple payments, paying late consistently, or going over your mileage limit. It breaches your loan agreement.
Once in default, the repo process can begin:
-
The lender sends a default notice and demands full repayment of the loan.
-
If you cannot pay in full, the lender has the right to take the car. They will hire a repossession company to retrieve it.
-
The car is sold at auction and proceeds go towards your loan balance.
-
Any remaining loan balance after auction must be paid by you. The lender can take legal action to collect on this deficiency balance.
Obviously, you want to avoid repossession at all costs. It severely damages your credit and leaves you without a vehicle. But it’s reassuring to know the lender has a form of recourse if you truly cannot make payments.
Tips for Getting the Best Secured Car Loan Rates
Because secured loans are so common, interest rates can vary widely among lenders. Here are some tips for scoring the lowest rate on your auto loan:
-
Maintain a credit score over 700. Borrowers with “good” credit get better loan terms.
-
Opt for a shorter 3-5 year loan term rather than a 6 or 7-year term. Shorter terms mean lower rates.
-
Provide a down payment of at least 10% if possible. Higher down payments signify less risk.
-
Compare options from banks, credit unions, and online lenders. Don’t just accept the dealer’s first offer.
-
For used cars, stick to vehicles 5 years old or newer with under 60k miles. Older cars are seen as riskier.
-
If your credit needs work, add a co-signer with strong credit or consider a “buy here, pay here” dealer.
Putting in the work to get approved for a secured auto loan is well worth it for most buyers. Drivers get to enjoy reasonable rates, flexible terms, and the security of collateral. As long as you repay on time, a secured car loan lets you safely get on the road while building your credit.
How We Make Money
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.
T Turovska/Getty s Bankrate logo
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Heres an explanation for . Bankrate logo
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our loans reporters and editors focus on the points consumers care about most — the different types of lending options, the best rates, the best lenders, how to pay off debt and more — so you can feel confident when investing your money. Bankrate logo
Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo
What a secured auto loan is and how it works
Secured auto loans are the most common type of auto loan. They are offered by a wide range of lenders that work with borrowers across the entire credit spectrum. While the requirements you need to meet will vary by lender, overall, secured auto loans are much easier to find and qualify for.
Like any loan, you will be responsible for repaying the amount you borrow plus interest and fees. When you take out a secured auto loan, you use the car you are purchasing as collateral for the loan. This means that the lender will keep the car title until you finish paying off your loan.
If you are unable to repay, the lender can repossess your vehicle and sell it to recoup the loss. Because of this, lenders are more likely to offer competitive rates and work with borrowers with bad credit.
What is a Secured Loan and How does it work? | Secured Debt vs Unsecured Debt | Secured Debt
FAQ
Is a car a secured or unsecured loan?
How do I know if my car loan is secured?
What is considered a secured loan?
Is a car a secured debt?
Is a car loan a secured loan?
Most auto loans are secured. Secured car loans require collateral — typically, the car itself — to get approved. If you apply for a secured loan, you may have better approval odds and a more attractive interest rate, as this type of loan poses a lower risk to the lender. The lender can repossess the vehicle if you default.
Is a secured auto loan right for You?
Secured auto loans are the most common financing option for borrowers looking to purchase a vehicle. These types of loans tend to offer larger loan amounts and more competitive interest rates compared to unsecured auto loans. In most cases, a secured auto loan is the right move.
Should I get a secured or unsecured car loan?
In most cases, a secured auto loan is the right move. But those buying an older or damaged used vehicle may prefer an unsecured auto loan. A secured auto loan uses the car you are purchasing as collateral. It is the standard option on the market. Most banks, credit unions, online lenders and dealerships exclusively offer secured car loans.
What is a secured loan?
A secured loan is a type of debt backed by collateral, which is something you own, such as a house, car or savings account. There are different types of secured loans, but they all have one thing in common: If you fail to repay the loan, you can lose your asset. Banks, credit unions and online lenders offer secured loans.