If you have been searching for car loans, then you have probably stumbled across the terms ‘secured’ and ‘unsecured’. In this easy guide, you can learn about the differences between the two and how they can affect your finances in the long run.
What is a Secured Car Loan?
A secured car loan is a loan which is backed by a collateral i.e. financial assets you own such as a home or car that can be used as a payment to the lender if you are unable to repay the loan.
Advantages of Secured Car Loans
Low interest rate: As secured loans are backed by collateral or security i.e. your car or some property. The rate of interest offered on such loans are comparatively lower when compared to unsecured car loans.
Fast loan processing: As car loans are backed by collateral, it thus involves lenient eligibility criteria and minimal documentation. This enables lenders to process the loan faster. If you meet the eligibility criteria, the loan processing will be done in less time.
Longer loan term: The term for secured car loans ranges from 1 to 5 years or can also go up to a maximum of 7 years with some banks. Longer loan tenure gives enough time to the borrowers to repay their loan.
Higher loan amount: The secured loans allow you to borrow larger amounts of money at lower rate of interest. This is because the lender is more confident as they will not be losing money even if you make default.
Flexible income requirements: Since the loan is backed by an asset, income level is not a major constraint while applying for this loan.
What is an Unsecured Car Loan?
An unsecured car loan is a loan wherein the borrower is not required to provide any collateral or security to avail of the loan. Such loans are offered based on the borrower’s credit score and previous financial history.
Advantages of Unsecured Car Loans
Your car is not at risk in case of default: When you apply for an unsecured car loan, you are not required to give any collateral in the case you make default. However, this will affect your credit score and your ability to avail credit in the future.
Simplified application procedure: The application process for such loans is simple and straightforward. You can apply for the loan either online at your preferred bank's website or the FinTech portal. Make sure you have a good credit score and stable repayment history to avail of the loan easily.
Quick access to funds: Since the loan application, approval, and disbursal of this type of loan is very simple, an individual can have quick access to funds to purchase the car of their own choice.
Flexible loan tenure: The biggest benefit of an unsecured car loan is that the borrower has the flexibility to decide and negotiate the term of the loan with the lender. This will not only help the borrowers to repay off their loan easily as per their convenience but will also reduce the allocated risk of the debt.
Low rate of interest for good credit score: If you have an excellent credit score and credit history, you might be eligible for an unsecured loan with low-interest rate. This is an added advantage in such a scenario since you can not only purchase your car without having to pay a high-interest rate on your debt but also don’t need to provide any collateral to avail this loan.
No eligibility requirements of the vehicle: When you opt for an unsecured loan, the lenders are not usually concerned about which car you are buying as there is no need for any collateral. Therefore, the borrowers have the complete freedom to select the car of their choice.
Which type of loan is right for you?
Both secured and unsecured loan have their own benefits. Depending on your individual situation and requirement, you can make your choice. To make an appropriate choice, you should ask yourself the following questions and choose the most reliable loan for yourself.