Secured Car Loans
Article by Ricky Homer
Many people are not sure of the difference between secured and unsecured car loans and how that difference affects your finance and their repayments. The car loans terms can be only minor, but is bigger when the true cost of each is taken into account.
Understanding secured and unsecured car loans in detail can be useful in saving money but, let’s first have a look at the numerous mechanism that determine the cost of your loan and of your monthly repayments. The cost of a loan is the total you repay less the sum borrowed. Hence, let’s say you are repaying ,000 at 12% interest rate over 36 months; you will pay back at the rate of 4.29 per month. That would total a repayment of ,914.44, and the cost of the loan would be ,914.44 plus any set-up or administration fees. A loan calculator will enable you to work this out for yourself.
An substitute to a car loan package would be car hire purchase (HP), where you hire the car over the repayment period and obtain the owership papers to the vehicle with your final payment. Until then the car belongs to the HP company.
However, most finances are either secured or unsecured, and not all financiers offer unsecured car loans so let’s look at secured car finance first. Secured car finance is one whereby the lender offers the loan with the car as security. If you fail to make payments, the lender can sell the car to recoup their money. It is possible to get a secured car loan on old cars, often 7 years, but the finance term could be shorter than 5 yearsor not at all by using your home or some other form of security. These are not exactly classed as car financing. It is generally the car that is the security.
Secured car loans can include on-road expenses such as the registration, insurance to protect you against disability,death or unemployment and comprehensive auto insurance as part of the financing deal. Loan insurance makes sure that the finance is paid off in the event of your death during the loan period, and car insurance is needed to make sure that the car is in good condition should it be needed to repay the finance in the event of you defaulting on your loan commitment.
This might look hard, but these are conditions you see with most secured car loans, not only car loans. You can normally have a secured car loan over one to five years, and the interest rate will be lower than that for an unsecured car loan where the loan company charges extra to compensate for their added risk. If you put deposit or trade amount off the finance this will lower the repayments, or a shorter term, whichever you prefer.
Balloon payments could be an option on your finance package, which is like a deposit in reverse, payable at the end of the period. This is popular by those whose income will increase over the period, and they will be in a better financial position to pay a lump sum in 3 – 5 years time. This too results in either a cheaper repayment per month or a shorter repayment term.
If you are on the lookout for a used car, your loan will be priced differently according to the financier and the age of your car. Many will charge higher interest rates, and the current credit squeeze has changed the outlook of many lenders to unsecured car loans in particular. Many no longer offer unsecured car loans due to the increased risk in the current economic climate.
However, they are still available, and some finance brokers can deal with a variety of unsecured car loans companies. In addition to the interest rate on such loans, you should also compare the fees charged, since they can involve a considerable outlay for you before you get the loan.
The major differences between secured and unsecured car finance, therefore, can be summarized as:
Secured car loans are more affordable to repay, with usually lower rates.
You need to have full comprehensive car insurance with all secured car loans, while unsecured financing does not.
Both finance packages could require death insurance cover for the finance, but secured car loans are more likely to.
You can sometimes include insurance, registration and other costs in the secured loan, but with an unsecured car loan you must include the the outlay on top of the amount borrowed.
Fees for unsecured car loans can be very much higher than for secured car finance.
Not all lenders will offer unsecured car finance.
There few doubts that if your automobile is young enough to be given a loan with the motor car as security, then that should be your option. You might be able to arrange a secured finance for an older car with your dwelling as security, but you will have to make sure to maintain the loan repayments since lenders are becoming unsympathetic in the current economic climate.
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