Secured or unsecured car loans, what is the real difference and how that difference affects their finance and their repayments. Basically the difference is small in terms of the car loan details themselves, but is larger when the true cost of each is taken into account.
Before discussing secured and unsecured car loans in more detail, let’s first have a look at the different mechanism that determine the cost of your loan and of your monthly repayments. The cost of the car finance package is the total you repay less the amount borrowed. Hence, let’s say you are repaying $20,000 at 12% interest rate over 36 months; you will repay at the rate of $664.29 per month. That would total a repayment of $23,914.44, and the cost of the loan would be $3,914.44 plus any set-up or administration fees. A loan calculator will enable you to work this out for yourself.
An alternative to a car loan package would be car hire purchase (HP), where you hire the car over the repayment period and be given the title to the vehicle with your final payment. Until then the car belongs to the HP company.
However, most credits are either secured or unsecured, and not all loan companies offer car loans that are unsecured so let’s look at secured car finance first. A secured car loan is one whereby the lender offers the loan with the car as security. If you fail to make payments, the lender can sell the car to recoup their money. It could be probable to get a secured car loan on older motor vehicles, often 7 years, but the finance term could be shorter than 5 yearsor not at all by using your home or some other form of security. These are not exactly classed as a car loan. It is generally the car that is the security.
Secured car loans can include on-road expenses such as the registration, loan protection insurance for disability,death or unemploymentand comprehensive auto insurance as part of the financing deal. Loan protection insurance makes sure that the loan is paid off in the event of your death during the loan period, and car insuranceis needed to make sure that the car is in good condition should it be needed to repay the lend in the event of you defaulting on your loan commitment.
This might all sound like doom and gloom, but these are conditions you see with most secured car loans, not only car loans. You can normally have a secured car loan over one to five years, and the interest rate will be lower than that for an unsecured car loan where the lender charges extra to compensate for their added risk. As with any loan, a deposit will result in lower payments, or a shorter term, whichever you prefer.
You could also apply a balloon, which is like a deposit in reverse, payable at the end of the period. This is popular by those whose income will increase over the period, and they will be in a better financial position to pay a lump sum in 3 - 5 years time. This too results in either a lower monthly repayment or a shorter repayment term.
If you are purchasing a used car, your finance package will be priced differentlyaccording to the finance company and the age of your car. Many will charge higher interest rates, and the current credit squeeze has changed the outlook of many lenders to unsecured car finance in particular. Many no longer offer unsecured car finance due to the increased risk in the current economic climate.
However, they are still available, and some car loan brokers can assist in getting you a good low rate unsecured car loan. In addition to the car finance interest rates, you should also evaluate the fees charged, since they can involve a considerable outlay for you before you get the loan.
The main differences between secured and unsecured car finance, therefore, can be summed up as:
Secured loans are cheaper to repay, with in general lower interest rates.
You need to have full comprehensive car insurance with all secured car loans, while unsecured financing does not.
Both finance packages could require life insurance cover for the credit, but secured car finance packages are more likely to.
You can sometimes include comprehensive insurance, registration and other costs in the secured loan, but with an unsecured car loan you must include the the outlay on top of the amount borrowed.
Fees for unsecured loan package can be greatly higher than for secured loans.
Not all car loan lenders will offer unsecured motor loan.
There few doubts that if your vehicle is young enough to be given a loan with the motor car as security, then that should be your option. You might be able to arrange a secured loan for an older automobile with your residential home as security, but you will have to make sure to maintain the payments since lenders are becoming unsympathetic in the current economic down turn.
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