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Secured vs Unsecured Car Loan: Which One Should You Get?
As a car dealership, you know that most of your customers don't buy their new vehicles with cash. Many of your buyers need some kind of financing, usually a loan, to purchase a car from you.
Secured and unsecured car loans are two of the most common financing options available to buyers, but what's the difference between them? Should your dealership offer both?
If your business serves credit-challenged customers, it's tough to know which type of loan makes the most sense for them. Learn more about financing for car dealers to help you make the right choice for your dealership.
Secured and Unsecured Car Loans for Dealerships Explained
How is a secured loan different from an unsecured car loan? It's common to confuse these two types of loans. Keep reading to learn more so you can choose which is best for your business.
What Is a Secured Car Loan?
With a secured car loan, customers must make regular payments on their vehicle or risk the lender repossessing their car. This doesn't just include the principal; buyers need to make interest payments, too. Lenders can repossess the car after just one missed payment, although many lenders will give buyers two or three missed payment cycles before declaring a loan in default.
Secured car loans have lower interest rates than the unsecured variety, though, which can be appealing to many buyers. Opting for a secured loan can help your customers spend less on their vehicle payments over time.
Secured loans also often come with higher borrowing limits. For a customer who wants to purchase an expensive luxury vehicle, a secured loan may be their best and only choice.
What Is an Unsecured Car Loan?
Unlike secured loans, unsecured car loans don't use the buyer's vehicle as collateral. This means that even if they miss payments, the lender cannot repossess their car. However, the buyer's credit rating can take a hit, so it's important that they pay on time.
Usually, buyers need to apply for a personal loan if they'd like to use an unsecured loan to buy a car. Some unsecured car loans require a co-signer if the borrower doesn't qualify for the loan on their own.
Compared to secured loans, unsecured car loans can be more challenging to qualify for because the buyer isn't using any assets as collateral. Still, unsecured loans may be a smart option for customers who don't want to risk the repossession of their vehicle.
Which Factors Do Lenders Consider for Secured and Unsecured Car Loans?
Before approving customers for a loan, lenders will consider the following factors:
- Credit History: Does the borrower have a pattern of meeting their financial obligations? If not, their credit score might be too low to qualify for a loan. Borrowers with bad credit may still qualify for a loan, but their interest rate will likely be very high.
- Income: Lenders want to know that a borrower earns enough money to pay off their loan. The lender may ask for bank statements, tax returns, pay stubs, or other proof of income.
- Debt-to-Income (DTI) Ratio: This factor considers how much of the borrower's pre-tax income goes to their debt payments. If the borrower has too much debt already, they may be less likely to make payments on their car loan.
Contact Edge Financial Services to Learn More About Your Options
At Edge Financial Services, our goal is to help dealers provide financing to buyers who have poor credit or limited credit history. If your buyers need a loan to buy a vehicle, we're here for you.
We understand that life happens, and your customers shouldn't face challenges in the car-buying process just because of their credit history. It's our mission to streamline the loan approval process so you get paid for the sale fast. Contact us at
(866) 890-2415 to learn more about our car
financing options for your credit-challenged customers and the differences between a secured and unsecured car loan.
