When an asset-owning consumer is looking to get financing on a vehicle, whether it's new or pre-owned, they will be looking at two basic choices: unsecured car loans and secured car loans. Both of these types of auto loans come with specific issues of liability for the borrower and the lender.The secured car loan is where a borrower uses collateral to "back up" a debt. The pros of this approach include a better chance at low interest rates, and an easier process, because the collateral creates "trust" between the lender and the borrower.
An unsecured car loan is when no such collateral exists, and the lender has to grant an auto loan based on the "value" or credit history of the car buyer. In this case, all kinds of issues come up, such as no-credit (where the buyer never had to get a loan before) and bad credit (where past debts make a customer a high risk).
So how do car buyers differentiate between unsecured car loans and secured car loans? Each potential borrower has to take a good close look at their finances to make this sometimes difficult decision.
The analysis begins with a credit report, which a potential car buyer can get from any of the three credit agencies: Transunion , Experian, and Equifax. Then, the consumer can see how this credit score would affect the "average lender" by shopping around for unsecured auto loan rates.
One other issue to consider with secured car loans is that the borrower will have to take out additional insurance on their collateral. If the resulting insurance would be affordable, this is fine, but if, due to some high risk factor, the buyer would end up paying more in additional insurance than on the actual loan's principle and interest, the unsecured loan would be a better idea in most cases.
The unsecured car loan also allows for a case where the borrower cannot pay. In this case, the debt goes to collections and marks up the borrower's credit rating. On the other hand, in a secured car loan situation, the lender can take the collateral from the borrower, which can be a serious liability for that borrower.
If a car buyer knows that they will be able to pay their loan off as intended, a secured car loan can be a great way to get lower rates, but only if the above factors don't threaten to sink the deal. The best bet is to go to trusted lenders and negotiate manageable terms and interest rates for either kind of loan. Also, continuing to work on individual credit ratings will have a great effect on all kinds of future loans and credit situations.