You may have heard the terms “secured” and “unsecured” loans thrown around. Your auto loan is considered a secured loan, but what does that mean? How do secured loans work and what happens if you default?
A secured loan is generally money you borrow to finance a large asset. Secured loans use collateral (the security pledged for the payment of a loan). Unsecured loans, such as credit cards, don’t use collateral (in this case, creditors only take your word you’ll repay the debt). A secured loan helps give lenders the confidence to loan you money. If a borrower doesn’t make their payments, the lender has the option to take possession of any assets used as collateral (your car, in the case of an auto loan).
The biggest benefits of a secured loan are the lower interest rates and longer repayment periods. Unlike unsecured loans, which are normally short term, secured loans, such as auto loans or mortgages, can have a term as long as 72 or 84 months. Because the loan is secured with a vehicle, the average interest rate of an auto loan is also lower than a credit card or even a personal loan.
When You Default…
Repossession is the most common result of defaulting on a secured loan. Depending on the lender, it can only take one missed payment for repossession – especially if the loan is for a car. After a repo, you’ll need to act quickly to make up any missed payments, because your car will be sold at an auction by the lender. If it sells for less than the amount owed, you’ll be responsible for the difference, plus any repossession fees.
It’s important to understand what a secured loan is. Your auto loan choice is just as important as the type of car you pick. If you’ve been stressing over auto loans because your credit isn’t perfect, SLG Progressive + Commercial Insurance Agency wants to help.
We work with an extensive network of special finance dealers who have lenders available to help people in many types of credit situations. It’s simple to start the process by filling out our free online auto loan request form.