If you are considering a loan for your next vehicle purchase, there are many things you have to research and prepare. At the top of the list is probably whether to get a secured or unsecured loan. It is quite easy to differentiate between the two.
To explain it simply, a secured loan is attached to collateral, such as a house, a car, or other property that the bank or the lender finds to be of value. In case of payment default, the lender has the right to confiscate the property in lieu of loan payment.
Conversely, an unsecured loan is not connected to any collateral. Should you default on the loan payment, the lender has no property to take over. Some examples of these types of loans are credit card debts or personal loans.
While it sounds like unsecured loans are more beneficial to the borrower, it comes with certain risks as well. Among other reasons, unsecured loans tend to charge higher interests which pile up the more you skip on payments.
In some cases of unsecured loans, the financial institution would require a personal guarantee or blanket claim which could place your personal and business assets at risk in case of default. While they cannot take over these assets, they can hold them hostage until such a time that the loan is paid in full, including interests. This could include your bank accounts, business resources, or anything of financial value that could be linked to you.
Thus, over the long term, a secured loan would prove to be more cost-efficient and borrower-friendly, especially when it comes to car loans. Here, we list down reasons why a secured loan is better for your next vehicle purchase. If you want to know more information on car loans, click here.
- Higher Loan Value
Because a secured loan comes with a collateral guarantee, lenders like banks and other financial institutions feel more secure and become more willing to fork out bigger loan amounts. This is because they are sure to get something if ever the loan is not paid back. Since the value of the collateral is higher than the cost of the loan in most cases, the financial institution stands to gain whether you pay the loan in full or not.
This does not mean that only the financial institution will benefit from this arrangement. Borrowers like you also stand to gain by getting the exact amount you need to pay for the vehicle that you intend to buy. In effect, you do not have to shell out additional cash or dig through your savings to make up for the discrepancy in the loan amount.
- Friendlier Loan Arrangements
Since the risk to the financial institutions is lower with a secured loan, they can be more accommodating when it comes to payment terms and duration of the loan. There is no need to rush to get their money back since they have a backup plan should you falter in the amortization.
With longer payment terms, the borrower feels less pressured to complete the loan. Monthly payments also tend to be lower since the loan amount and the interests incurred are stretched out over a long period.
If your credit history is not exactly perfect, a secured loan could also help you get the nod from the financial institution. They may accept a lower credit rating, require a lesser amount of documents to show the capability to pay, and accept a lesser proof of income. The review and approval process will not be as tedious as it will be for an unsecured loan.
- Smaller Interest Rates
Financial institutions also usually offer lower interest rates if you are getting a secured loan. This is because they rely on the security of the collateral. With the threat of losing not only your previous loan payments but also the full collateral upon default of payment, you are more likely will be more serious in completing the loan on time.
This is basic human nature and the lender relies on this when they issue secured loans. After all, nobody would be willing to accept a loss, so having the collateral as a hold on the borrower gives the financial institution more assurance that the loan will not default.