Purchasing a car isn’t cheap, so more often than not, we turn to a financing plan or a loan to make sure that we have sufficient funds to bring one home from the dealerships. And because we work with loan applications every day, we know that there are plenty of options and choices to choose from – it can make getting your loan confusing and stressful when there are so many things to consider.
The Smarter Finance Company would just like to share a little deeper insight on the differences between a secured and unsecured loan in the hopes that it can help make the decision of what financing plan to sign for a little easier!
What is a secured loan?
Before we begin looking at the different options, we need to look at what it means to have your loan “secured”. Basically having a secured loan means that when you borrow money to pay for something, something else is used as a pledge against the item that you are going to buy. In case payments are defaulted, the lender or finance company can claim that other item as restitution for their losses when they do not receive that payment. The item which is pledged is called a “security” and the loan becomes “secured”.
How does having a security attached to a plan help?
When a borrower pledges an item in order to apply for a loan, it is obvious that the borrower would try his best to make payments in order not to lose the pledged item as well as receive a bad credit score, especially when the pledged item is the car itself, company assets, your home or other big ticket items. . Even if something were to happen that caused payments to be defaulted, the lender has an option to stake claim on the item being pledged so they can recap any losses caused from not receiving repayments and interest for the loan.
Therefore, lenders tend to act more favourably towards loans which are secured since there is a smaller chance of the loan being defaulted. That means, larger amounts can be loaned, lower interest rates granted and longer loan tenures offered too. For a borrower, that means so many more options!
So which one should I choose?
Generally, people who can afford to opt for unsecured loans so that they don’t have to worry about their collateral getting repossessed. If you’re looking at car financing for your new or used vehicle, there are a number of factors that a lender will look at before offering you a car financing plan. This includes your personal character and capacity to pay for your loan and may involve submitting a number of documents such as identification, income proofs and other evidence of asset worth in your possession. If you find that based on your personal criteria that the rate offered to you is not favourable, or affordable, perhaps you can look at a secured loan instead.
Whichever you decide, it’s a good idea to look for a reputable financial consultant or comparison company who is able to walk you through the different options available for car financing so that you can get a good understanding of how they may work to your advantage. It would definitely make things easier for you to decide what might suit you the best!