A secured auto loan is a loan that uses the car you are purchasing as collateral for the loan. To do this, the lender will keep the car title as a guarantee for repayment if you cannot pay the loan back. Holding the title allows the lender to prevent the sale or trade of the car if the amount won’t cover the amount due — unless the borrower pays the difference.

Secured auto loans usually have terms up to 84 months — longer than most unsecured auto loans. While the process of getting a secured auto loan is similar to the process of getting an unsecured loan, it is important to consider the benefits and drawbacks.

What a secured auto loan is and how it works

Secured auto loans are the most common type of auto loan. There are a range of options available, and they tend to be the simplest type of auto loan to understand. But not every lender that you come across will offer secured loans and even lenders that do hold varying guidelines.

When you take out a secured auto loan, you use a specific asset — the car you are purchasing — as collateral for the loan. As mentioned, this means that the lender will keep the car title as a guarantee for repayment if you cannot pay the loan back.

Benefits of secured auto loans

Secured loans can be a good choice if you are looking for a lower interest rate, a longer loan term or to finance a more expensive vehicle, especially if you plan to keep the car for a while.

Longer loan terms

Secured auto loans usually have terms up to 84 months, which is much longer than most unsecured loans — auto or otherwise. While a longer loan term means you will pay more in interest over the life of the loan, it may be worth it if you feel that you may be able to make extra payments down the road or if you need the lower monthly payment.

Easier to qualify

Another advantage of getting a secured loan is that it is easier to qualify. The lender will look at your credit score, income and debt-to-income ratio. But if you don’t have great credit, a secured loan can be a good option because the lender isn’t taking as big of a risk when it has collateral.

Lower interest rates

Secured loans are typically offered lower interest rates than unsecured car loans. Again, if you don’t have the best credit, this can be an especially helpful advantage when shopping for a new car.

How to get a secured auto loan

The process of getting a secured auto loan is similar to that of getting an unsecured loan. You’ll need to go through a lender or financial institution and fill out an application.

Following that, you will have to provide information like your current employment history, income, residence and any debts and savings you have. You also should prepare for the lender to run a report to get your credit score.

Be sure to also have your most recent pay stub, personal and vehicle information, bank statements and proof of residence with you. It is a good idea to calculate your expected interest rate and monthly payment ahead of time by taking advantage of an auto loan calculator.

If approved, you will sign a loan agreement and the lender will start sending you monthly statements. Prepare to begin making your monthly within the first month. And if you can, set up autopay to ensure your car payment is always paid on time.

What to consider with secured auto loans

Secured loans can be a good option if you don’t have strong enough credit to qualify for a traditional loan. They are useful for drivers with a low loan amount seeking a low-interest rate and for those with better credit who want to pay a little more and get a better interest rate.

But these loans come with limitations, including a restricted selection of vehicles to choose from. If you are looking for a specific vehicle, such as a luxury car or electric model, you may not find it available with a secured loan. Also, you may need to pay more upfront to make the interest rate on the loan competitive.

If you can’t find the exact vehicle you are looking for with a secured loan, it’s worth exploring unsecured auto loans. These typically have lower interest rates, higher limits and more flexibility, including the option to finance 100 percent of the car’s value.

The bottom line

Understanding the basics of secured auto loans will help you make a smarter choice when financing your next vehicle. Depending on the state you live in, collateral might also be a worthwhile option when applying for a car loan. Take the time to compare different lenders to ensure you drive off the lot with the best deal.

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