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How to Secure Your Car Loans Against Your Car
●December 21, 2020●4 minute read
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Collateral serves as security for a loan you’re acquiring. Most times, strong assets are used as collateral to protect the lender from risk. How about using a car you just purchased as collateral for a short term loan? This option might sound great if you’re in a financial hassle or if you have a low credit score and unsure about your qualification for an unsecured loan. Here’s what you should know before taking a secure car loan;
What is a secured car loan?
A secured car loan also known as an auto equity loan is a type of loan that lets you borrow money against the value of your car. A secured car loan can apply whether you have full ownership or have some equity in the car. Putting up your car as collateral can offer you lower and more competitive interest rates which can save you money in the long run. You’re also more likely to get a higher loan amount with a secure car loan. These loan amounts mostly depend on income level, equity share in the car, car market value and your credit score.
There are two options to consider while offering your car as collateral. You can either take a secured car loan where you use your newly purchased car as collateral for a loan or take a secured personal loan where a car you already own is used to secure a loan for other purposes. Let’s take a look at how both options play out;
Taking a car loan with your new vehicle as security
This is a common option that allows you to use the car you’re buying as collateral for a car loan. These will come with a lower interest rate compared to an unsecured loan. However, your car stands a risk of being claimed or seized once you default on loan repayments.
Taking a personal loan with your car as security
In this case, a loan amount is giving in relation to the value of a car. The car can either be used or newly purchased, however, it’s worth noting that the age of the car will also influence the loan amount. A new car will have more value than an old car, and can therefore get you a higher valued loan. This particular loan can be used for anything asides the car. The car only serves as security for the loan. You also get a more competitive interest rate compared to an unsecured personal loan.
Here are some factors to consider before placing your car as collateral for a personal loan;
- The purpose of the loan
- The amount you wish to borrow
- Your vehicle’s eligibility and market value
- The risk involved with your car if you fail to make loan repayments when due.
Benefits of a secured car loan
Lower interest rates
Generally, a secured car loan tends to come with a lower interest rate compared to a loan without security. For an unsecured loan, the lender is at a higher risk and makes up for this with higher interest rates. A secured car loan provides your car as collateral, putting the lender in little to no risk, hence interest rates are also average and lower.
Your car can serve as a means to quick cash if you’re in a financial fix. Depending on the value of the car, you can get higher loan amounts with your car as security.
Easier to qualify
A secured car loan is a great option for people with less stable sources of income, such as contractors or self-employed people. They’re less likely to get an unsecured loan and most times opt for this option. It also allows people with low credits. The lender doesn’t really care much about your due loan repayments since he/she can always sell your car to claim the loan amount back.
A secure car loan allows you to properly budget and time your loan repayments with the fixed rates. The terms are flexible and give you better control on how the loan is repaid.
Larger loan amounts
You’re more likely to get a higher sum if you drop collateral. This sum will also depend on the market value of your car.
Are there disadvantages?
The main con to a secured car loan is the risk attached to your car. Your car can easily be repossessed if you default on payments. There might also be some restrictions on the type of car you can buy with a secured car loan. This solely depends on the dealer. They’re also additional fees attached that you should totally watch out for.
What should I look for in a secured car loan?
If you’re looking to take a secured car loan, here are some factors to consider;
Total loan amount
Compare the loan amount you’re being offered for the same car value.
Decide if you want a long or short loan term. A short loan term lets you pay off faster but a long loan term offers lower monthly payments. However, you would accumulate more interests over time.
Fixed or variable rates
Fixed rates allow for easy budgeting and planning. On the other hand, variable rates give more flexibility depending on market value rates. You can also convince your lender to give you a lower rate if there’s any fix.
Interest rates might look attractive at times but be sure you’re not paying more in fees.
After deciding on the option that suits you best, it’s important to start gathering important documents for loan application. Some of the documents you may need are; personal identification, proof of income, bank statement with copies attached, copies of bills, credit history, car information. These documents should be provided to your dealer/lender in other to pick the best terms for you. Be sure to carefully scrutinize your loan agreements, ensuring that all terms are favourable to you. You can do this with the aid of a financial officer for expert advice.
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Written by Jacaranda Team