What is the Difference Between a Secured Car Loan and a Car Title Loan?

A secured car loan, like a car title loan, involves borrowing with collateral. However, the similarities end there. A secured car loan is a way for someone with bad credit but great collateral to get a car. A car title loan is a way of accessing the cash value of your auto without selling it. The following paragraphs will explain the differences.

What Is a Secured Car Loan?

A secured car loan is an auto loan with something of equal value backing it up. This substantially reduces the lender's risk.

There are a number of reasons a borrower might want a car but be unable to finance the purchase. The car can be too expensive for the borrower's financial situation to support. The borrower might also have a poor credit history or credit score. However, if you have access to something of substantial value, it can be pledged as collateral on the auto loan.

Advantages and Disadvantages

The first advantage of a secured car loan is the borrower can gain access to a car the borrower might not otherwise be able to afford. With collateral from your home equity, for example, you can secure a car loan that your income or credit history did not support. Also, with collateral backing the loan, the lender will offer a better interest rate than a car loan with a traditional 20 percent down payment, and the loan payback terms can be extended well beyond the typical five years for an auto loan.

But there are disadvantages as well. For many borrowers, $20,000 or more of equity to purchase a new car is not available. It can be equity in a home, a collection of jewelry or other real estate. However, it in whatever form it comes, it is substantial. Also, once pledged, you lose some of the benefits of ownership of the collateral. As an example, if your home equity is pledged as collateral on a loan and you sell your home, the proceeds of the sale go first to your mortgage lender and second to your secured car loan lien holder. You only get the remainder. Finally, if you default on your secured car loan payments, the lender has a claim to the property you put up as collateral.

What Is a Car Title Loan?

A car title loan is a small, short-term loan made to you for cash with your auto acting as collateral.

Advantages and Disadvantages

A car title loan gives you great flexibility. You can use the money for almost anything you want. They are simple to apply for, often taking only minutes. Approval is fast, as is loan funding.

As to disadvantages, first, you must have a car with good value that is free of debt. Second, many consider this predatory lending. You pay high interest rates and fees and typically must pay the loan back in 30 days. Failure to pay means the loan amount mounts quickly and you could lose your car.

Alternatives

For a secured car loan, if you don't have the collateral, consider saving for a larger down payment, accepting a higher interest or buying a less costly car.

For car title loans, consider lenders who cap interest rates and work with you to ensure the loan amount doesn't balloon. Many credit unions are getting into this business with terms that are fairer to the borrower.

 


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