The Risks of a Secured Car Loan

Secured Car Loans carry much of the same risks that other loans do. These risks may be greater however, for secured loans due to the type of borrowers who take out these loans. The risks include a higher potential for loan default, the effect of these loans on a borrower’s credit score and the difficulty in refinancing a secured loan.

Secured loans are collateralized debt secured by an asset. This collateralization provides some level of security for a lender since there is an asset available to cover the loan in the event of default. Taking out a secured loan means that a borrower is ceding control of that asset until the loan is repaid. Before taking out this type of loan, a borrower should consider the impact of taking out a secured car loan. The loan can provide an individual with poor credit with the capital they need to purchase a used or new car. However, if a secured car loan is the only available option for car purchase, consider the following risks:

Higher Potential for Loan Default

A secured loan can have a higher loan default potential, mainly due to the higher interest rates that are typically associated with these loans. A secured loan is typically made to individuals with lower credit scores where default risk would be higher. Higher interest rates translate into higher monthly payments that may be difficult to sustain over time. The higher rates and costs associated with a secured loan can compound the potential for the loan to go into a default status.

Affect on a Borrower’s Credit Score

A secured loan represents a high risk to the lender because of the potential for loan default. This high risk potential can translate into a mark against the borrower and affect their credit score. A lower credit score will have an impact on any future borrowing and reduce opportunities for the borrower for other forms of loan financing.

Reduce Ability to Refinance Loan

Secured loans are difficult to refinance.  This can be because of the type of borrowers who access these loans and the potential for default. A borrower’s inability to refinance a secured loan means that they will need to continue to pay higher monthly payments and interest rates or be subject to loan default measures.

The risks are high for secured car loans. A borrower should weigh all of their options before taking out the loan. The risks can affect the ability of the borrower to get other loan financing and impact the credit score of the borrower should the loan go into default.

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