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Advantages and Disadvantages of Secured Car Loans

In the world of loans, one can choose from secured and unsecured loans. A secured loan is one that is secured through collateral or security. An unsecured loan is one that does not have any collateral.

Since the loan is not secured with any asset, the lender suffers from higher risk. Hence, an unsecured loan comes with higher interest rates.

A car loan is typically a secured loan that provides you with finances to buy your dream car. Since the loan is secured in nature, your car will be used as the collateral. There are also some secured loans that involve car title loans or car loans with a line of credit or an equity loan.

Secured car loans come with a host of benefits as well as disadvantages. It is very important to be aware of each of these features before you pick a car loan for yourself. You may be in a hurry to purchase the automobile of your dreams. However, you should give some time to do enough research about the different types of loans so that you can make a sensible financial decision.

Let us now take a look at some of the pros and cons of secured car loans. First, let us discuss the advantages:

These Loans are Offered Quickly:

When you apply for a secured car loan, you do not have to spend a lot of time waiting. Your lender will process it in a speedy manner as they won’t take a lot of time to assess their risk when the money is given to you. Once they know that you are presenting them with a collateral, they will be able to understand your repayment capacity and will sanction the loan in a jiffy.

Lenders will not be Strict About Income Requirements:

Since the car loan is secured, your lender will be assured that you will repay the loan on time. The risk level of the lender is low due to the presence of security. Hence, you will not have to worry about high-income requirements. If you earn a decent income on a monthly basis, that is more than enough. Your loan application will most likely get approved.

If you have a Reasonably Good Credit Situation, you are Safe:

When you apply for a secured car loan, your lender will certainly check your credit score and credit history. However, they will not be too particular about your existing credit situation as you are securing the loan with an asset. Due to this, they wouldn’t be too picky even if you have a pretty low credit score or a poor credit situation.

You can Build your Credit Profile by Applying for a Secured Car Loan:

No matter what loan you apply for, you can definitely strengthen your credit profile. With a secured car loan, you can build your credit profile at a pretty low cost since your loan interest rate will be comparatively low. Also, your loan EMIs will be low. Hence, this way, you can boost your credit score and your creditworthiness by being financially efficient.

Now, we will discuss the cons of secured car loans:

Your Asset may be Seized if you Default your Loan Payments:

Since your secured car loan is protected by an asset, be it your car or equity or line of credit, your security could get seized by your lender if you fail to make your repayments on time. Hence, you will need to be very careful during your loan tenure, and make sure that you pay each instalment promptly.

Otherwise, if you fail to pay your EMIs several times, your lender will take the possession of your asset. The lender may take over the ownership of your asset through a foreclosure. Moreover, your credit rating can also get ruined. This is a major drawback of secured car loans.

With a Variable Rate Secured Loan, you may End up Paying Very High Amounts:

Since rates fluctuate extensively in a variable rate loan, you may have to worry when rates increase. Your repayment amount will drastically be high. Also, in case you choose to clear your loan early, you may be charged with an additional fee.

Your Car’s Value can Come Down due to Depreciation:

During your secured loan tenure, your automobile’s value can reduce gradually due to depreciation. Once you hit the car on the roads, it starts to get depreciated. Hence, even if you are someone who pays every EMI on time, the value of your car, which is the security for your loan can gradually decrease.

Now, you are aware of the potential advantages and limitations of secured car loans. You can choose to go ahead with a low-interest secured car loan if you think you can handle the loan efficiently. You can pick the tenure and rate of your car loan depending on your income, repayment capacity, other monthly expenses, and your overall financial condition.

Ensure that you compute your EMIs by using online EMI calculators. This will help you assess your loan expenses accurately.

You May Like to Read: Benefits of Using a Personal Loan Calculator
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