A secured loan requires the borrower to offer an asset as collateral until the loan can be paid back in full. An unsecured loan, on the other hand, does not have any collateral attached to it.

An unsecured loan is usually taken out for home repairs, credit cards, and other circumstances where there isn’t an item that can be used as collateral.

There are some dealerships that offer unsecured auto loans, but it's important that you understand what that might entail before you make any decisions.

Choosing between a secured and unsecured

car loan

is all dependent on your specific needs and financial situation—deciding between the two can help save you money in the long run.

And while it can be a long process to figure out your auto loans, finding the perfect

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Continue reading to find out more about secured and unsecured auto loans.

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What are secured loans?

A secured loan allows lenders to have collateral that can be used to repay the loan if payments aren’t fulfilled.

This reduces the risk for lenders, as they have a guaranteed asset they can take ownership of if the repayment stops.

In the case of a secured auto loan, the vehicle itself will most likely act as collateral. The lender can take possession of the car and re-sell it in order to make up for the rest of the unpaid loan.

Key Takeaway With an auto loan, the car usually acts as collateral for the loan.

Pros of secured loans

They often have longer repayment periods, so you’ll have more time to pay your loan off.

Secured loans are easier to qualify for if you have bad credit, with the collateral making up for any added risk that may come with a bad line of credit.

The lower risk associated with a secured loan also usually means lower interest rates—and if you have good credit and valuable collateral, lenders might even compete and offer better rates to secure your business.

Cons of secured loans

Easily the biggest downside to a secured loan is a possible loss of assets—in this case, the borrower would lose their car if they can’t fulfill payments.

Like with any loan, a failure to pay can lead to your credit score being damaged. This can impact any loans you may want to take out in the future.

MORE: The best car insurance for bad credit drivers

What are unsecured loans?

Unsecured loans, on the other hand, aren’t tied to assets or collateral (i.e. your car).

They’re usually offered for home repairs, upgrades, or credit cards, where there really isn’t an item that can be repossessed by the lender.

Pros of unsecured loans

There’s no risk to your property and assets. They cannot be repossessed with unsecured loans.

Your loan may be approved faster because there is no valuation period for your assets.

Unsecured loans might be the better option if you only have to borrow a small amount.

Cons of unsecured loans

While the process is faster, unsecured loans are typically harder to qualify for, especially if you have bad credit. You also might require a co-signer.

The amount you can borrow is generally lower.

Unsecured loans typically have varied interest rates, so you might end up with rates that are pretty high.

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Is an auto loan secured or unsecured?

The majority of car loans are secured, with the car acting as collateral. Mortgages and car loans are actually the most common type of secured loans.

There are some car dealerships that do offer unsecured loans for cars. It can lead to a faster application process, but far stricter eligibility criteria.

The standards for a secured loan will differ from place to place, but they most often will use the following criteria:

Income

Debt-to-income ratio

Credit score and history

Credit check results

You are almost guaranteed lower interest rates if you choose to take out a secured loan, but you also stand to risk repossession if you are unable to fulfill your payments.

And while you will have higher interest rates with an unsecured loan, you also will not have to worry about losing your car if your payments are missed.

Whether you choose to go with a secured or unsecured loan is up to you, and is dependent on your personal financial situation and the size of the loan you intend to take out.

Key Takeaway Most auto loans are secured loans. Some car dealerships offer unsecured auto loans, but the eligibility requirements are stricter.

MORE:

How to find out if a used car has a lien

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No matter the choice you make with your loans, there are plenty of other ways to save money when it comes to your car—and one of those ways is through finding cheap

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If I have bad credit, is a secured or unsecured loan better?

In the case that you have poor credit, a secured auto loan will be easier to qualify for.

The majority of lenders require you to have a cosigner in the case of unsecured loans, so that could be an option if you do have bad credit and are looking to sign a loan that is unsecured.

Do I need a co-signer to get a car loan?

Unless you are unable to afford the loan by yourself, then you don’t need to get a co-signer.

A co-signer is obligated to pay back the loan alongside the primary borrower, so if you have good credit and strong financial standings, then a co-signer is pretty unnecessary.

If your financial situation isn’t as secure, then looking into having a co-signer might be a good option. Just be sure to do your research beforehand and decide on a co-signer that you know you can rely on.

What’s the difference between an unsecured loan and a payday loan?

Payday loans are short-term loans that are also known as cash advances or check loans. They are specifically designed for those with poor credit who might be unable to take out a personal loan—i.e. an unsecured loan.

They work so that the borrower is able to repay the loan when their next paycheck comes in, but this can lead to a dangerous cycle of debt, so be sure to do your research before you choose to take out a payday loan!

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