Unsecured or secured car loans, which is the one for you.

Unsecured or secured car loans, which is the one for you. One of the many options you must choose from when buying a car is the type of loan. Choosing the engine, model and car color might seem more interesting but the finance choices you make could affect you for longer. We all do well to research and understand the principles and facts behind the financial choices we make. Buying a car is after all one of the largest purchases you are likely to make.

So what are unsecured and secured car loans and what can they meant to you?

An unsecured car loan, or any kind of unsecured loan, is a  loan that is completely based on your personal credit scoring. That means the only security the banks or finance company that lend you the money have is your word that you will pay for it. A secured loan is a loan with a collateral that acts as a safety net for the lender in case you are unable or unwilling to pay. Collateral could be another person that vouches for you, a home, another car, or savings.

Unsecured car loans.

Unsecured car loans, because they have no collateral are hard to get approved. They often require either a great credit score or have very high interest rates. A good credit score is earned by having a good credit history of paying all your loans faithfully and on time. In order to get an unsecured loan you must need either a great reputation or be willing to pay extremely high interest rates. Unsecured car loans can come in the form of a family or friend loaning you money on your promise of you repaying it or through an I.O.U.

When offered by a lender without you having a good credit score it is very likely the interest rates will be high in order to cover the risks of borrowers not paying the loan. Unsecured loans are very similar to credit card loans. They have high interest rates and in the case of the borrower not paying back it is hard for the lender to force the borrower to sell valuables to cover the loan.

Another form of unsecured loan is the Hire Purchase agreement offered by some dealers. These loans consist on monthly payments the borrower pay in order to have the car. However it is not until the last payment is made that the car is owned by the borrower. Until the last payment is made the car is owned by the auto dealer.

Secured car loans, are loans that have a collateral included in the contract that will serve as a security to the lender in case the lender can’t or will not pay the loan. Security or collateral can come in the form of a house, a boat, another car or any other valuable good.

Which of these options is the best for you? Your personal situation and personality will dictate this. However take into account the risk of securing your loan with goods you could lose if you are unable to pay your loan and balance that with the difficulty of getting an unsecured loan and the high interest rates it might involve.