Loans which are given against collateral are called secured loans. For instance, mortgages and secured car loans. Often, such loans are taken to finance the purchase of an asset which is also the collateral.
Car loans which are secured by collateral – in most cases, the car that is being purchased with the loan and in some other cases, the car buyer’s equity in his home – are called secured car loans.
Contrast this with unsecured card loans where there is no collateral involved. A car purchased using a credit card constitutes an unsecured car loan (though it would be possible to buy only a second hand cars within the card limits). If a car purchase is funded by a personal loan where there is no security offered, it would also be an unsecured car loan. In the case of a personal loan, the lender only sees the creditworthiness of the car buyer.
When car loans are secured by the car being purchased, the lender retains possession of the title to the car. This title would be transferred to the buyer only after all the loan payments are made.
In the event of the borrower failing to pay a single installment in the course of the loan, theoretically the lender has the right to take possession of the car. In practice however, the lender initiates the procedure of possession only if the borrower misses installments time and again.
Sometimes, despite a loan being secured, the value of collateral may be insufficient to compensate the lender for the loan amount. In such a case, if the lender can hold the borrower liable for the balance amount, it is called a recourse loan. If the borrower can’t be held liable, it is called a nonrecourse loan. Secured car loans may be recourse or nonrecourse depending on the law of the state.
Secured car loans may be direct or indirect. Direct car loans are those where the bank or any other lender offers the loan directly to the car buyer. In an indirect car loan, there is an intermediary – the car dealer. The loan is routed through this dealer; he generally receives a commission or a share in the loan profit from the lender.
Secured car loans may have a fixed rate of interest where the interest rate does not change during the tenure of the loan. For a loan with a variable interest rate, the interest rate can be altered at the discretion of the lender.
Since the risk to the lender is limited, there are greater chances for secured car loan requests to be granted.
The interest rates offered are much less compared to those of unsecured loans.
Every lender sets his own policy regarding minimum income of the borrower. In the case of secured car loans, the minimum income requirements are less compared to other loans.
Tax laws of certain countries / states allow personal tax deductions for secured car loans.
The borrower’s credit score is not important to the lender of a secured car loan. All that matters to him is the value of the collateral – the car. Even people with bad credit can avail of secured car loans.
People wanting to buy cars through secured car loans should first compare rates of loans offered by different lenders and select one which offers the best terms. Some car lenders are unscrupulous and may adopt predatory lending practices. Car buyers should be wary of them.