Buying a house, getting a car, remodeling your home, or launching a new business are some of the biggest expenses you may incur in your life. Many people don’t have the cash to pay for expenses of this size, which is why they often take out loans to cover the costs. This is especially true when it comes to buying a new or used car.
New and used car prices have been climbing steadily over the last year. Right now, the average price of a new car is around $40,000 and the average price of a used car is about $23,000. Because prices are so high, many people have no other choice but to take out auto loans. If you’re thinking about financing a new or used vehicle, it’s important to understand how auto loans work.
An auto loan is money you borrowed to purchase a car, typically from a bank, credit union, online lender, or automotive dealership. Is an auto loan secured or unsecured debt? How can you find the right type of auto loan for you? Here’s what you need to know before applying for an auto loan:
What is the Difference Between A Secured and Unsecured Auto Loan?
There are two types of debt: secured and unsecured loans. The main difference between a secured and unsecured loan is the use of collateral, which is an asset of value that the borrower pledges to the lender to secure the repayment of the loan. An unsecured loan does not require the borrower to put up collateral, though a secured loan does.
A mortgage is one of the most common types of secured loans. If you take out a mortgage to purchase a new home, your home is used as collateral to secure the loan. This means if you fail to repay your loan, the lender has the right to foreclose on the property to satisfy your debt.
Auto loans are secured loans. Just like a mortgage, an auto loan is secured by the property you are borrowing money to purchase. Your lender will either hold onto your title or put a lien on it until your loan has been paid off in full. If you fail to repay your auto loan, the lender may take possession of your vehicle to satisfy your debt.
If you are not willing to use your vehicle as collateral to secure an auto loan, you may want to consider taking out an unsecured loan instead. An unsecured loan is a traditional personal loan that you can use to pay for a new or used car.
Unsecured vs. Secured Auto Loan Benefits
There are pros and cons to both unsecured and secured auto loans. Some of the benefits of an unsecured auto loan include:
- No restrictions on how money is spent. Because an unsecured loan is just a personal loan, there are no restrictions on how you use the money you borrow,
- No collateral. If you take out an unsecured loan, you won’t have to use your vehicle or any other asset as collateral.
- No liens. Because your vehicle isn’t used as collateral, your lender won’t put a lien on your title while you make payments on your loan.
Some of the benefits of secured auto loans include:
- Lower interest rates. Secured loans are not as risky for lenders as unsecured loans, which means they typically offer borrowers lower interest rates.
- Less expensive. The lower the interest rate, the less it will cost to borrow money to purchase a car.
- Easier to get. In general, it is easier to get approved for secured loans since they are supported by collateral, which means they carry less risk for the lender. You typically don’t need perfect credit to get approved for a secured loan, whereas a less-than-perfect credit score could affect your chances of getting approved for an unsecured loan.
Consider these benefits when determining which type of auto loan is best for you.
How Will Unsecured or Secured Auto Loans Affect Your Credit?
If you are still deciding between an unsecured or secured loan, you may want to know how each type of debt will affect your credit.
Your lender will perform a credit check whenever you apply for a secured or unsecured auto loan. This credit check, known as a hard inquiry, will appear on your credit report and negatively impact your credit score.
Taking out a new loan, regardless of whether it is an unsecured or secured loan, could hurt your credit. This is because one factor that impacts your credit is the average age of your credit history. Adding a new loan to your profile will lower the average age of your credit, which will negatively impact your score.
How you manage your loan once you are approved can impact your credit, too. If you want to improve your credit score, it’s crucial to make on-time payments on your auto loan. Payment history accounts for over one-third of your credit score, so missing even one payment could hurt your credit. If you make consistent, on-time payments, your auto loan could actually improve your credit score in the long run.
Taking out a secured or unsecured auto loan might also make your credit mix more diverse. Your credit mix is the variety of loans in your credit profile. If an auto loan diversifies your credit mix, this could improve your credit score.
Can You Refinance Unsecured or Secured Auto Loans?
Refinancing is an option for both unsecured and secured auto loans.
Refinancing an auto loan is the process of taking out a new loan to pay off an outstanding loan. Many borrowers choose to refinance to get a loan with more favorable terms, such as a lower interest rate.
If you can no longer afford your auto loan, you may want to consider refinancing. By refinancing, borrowers might be able to lower their monthly payment and save money. Some borrowers may even qualify to borrow additional money when they choose to refinance.
Contact your lender to find out if you can benefit from refinancing your auto loan. Learning more about your refinancing options will not impact your credit.
What to Consider When Comparing Auto Loans
Experts recommend shopping around to find the best auto loan. However, many people aren’t sure what to look for when deciding which loan has the most favorable terms. Here’s what to consider when comparing secured or unsecured auto loans:
- Annual percentage rate, or APR: The APR is the annual cost of borrowing money expressed as a percentage of the principal. The APR is not the same as the interest rate. The APR reflects the total cost of borrowing money, including additional fees charged by the lender, whereas the interest rate only reflects the cost of interest. The lower the APR, the less you will over the course of the loan.
- Term: The term, which is usually expressed in months, is the amount of time you have to pay off the loan. A loan with a long term will have smaller monthly payments but will cost you more over time in interest, whereas a loan with a short term will have larger monthly payments but will cost you less in interest.
- Monthly payment: Pay close attention to the monthly payment of each loan option. You should never take out a loan with a monthly payment you cannot afford.
- Hidden charges: Read the fine print of each loan agreement to look for hidden fees. These fees can drastically increase the total cost of your loan.
How to Apply for A Secured Auto Loan
Take the first step toward buying a new or used car by applying for an auto loan with LoanCenter today. Here’s what to do:
- Get prequalified. Before you start shopping, get prequalified for an auto loan so you know how much you will be able to borrow. Applying for prequalification is fast and easy, and it typically does not hurt your credit.
- Choose your loan structure. You will be presented with different loans with various monthly payments, interest rates, and terms. Review your options to determine which loan structure works best for your lifestyle.
- Add on optional coverage. You have the option of adding extra coverage to your loan, including a Guaranteed Asset Protection (GAP) waiver, warranty, Powertrain Coverage, or Advantage Coverage. These options will provide you with additional coverage, but they could also affect the total cost of your loan.
- Find a vehicle. Search for the car of your dreams on the LoanCenter website. You can browse a wide range of vehicles that you are already pre qualified for, which makes shopping for a car easier than ever before.
- Buy the vehicle. Once you find a car, download or print your pre-qualification letter and bring it with you to the dealership. Your car will be waiting for you when you arrive.
That’s all it takes to secure financing for your car with LoanCenter!