Is an Auto Loan Secured or Unsecured? 

Introduction

When applying for financing to purchase a new or used car, one of the first decisions you’ll need to make is whether to get a secured auto loan or an unsecured auto loan. Is an auto loan secured or unsecured? What exactly is the difference between these two common types of auto loans?

Understanding the distinctions between secured and unsecured auto loans is crucial, as the type of loan you choose will impact everything from your interest rate and monthly payments to the total cost and loan terms. This guide will explain what you need to know to decide is an auto loan secured or unsecured the better option for your situation.

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Defining Secured and Unsecured Auto Loans

First, let’s clearly define what makes an auto loan a secured one versus unsecured:

• Secured auto loan – The car itself serves as collateral for the loan. The lender places a lien on the title, so they have the right to repossess the vehicle if you stop making payments.
• Unsecured auto loan – The lender provides financing without requiring any collateral to back the loan. You keep sole ownership of the car.

With a secured auto loan, defaulting on the loan puts your vehicle at risk. The lender takes on less default risk due to the collateral.

An unsecured auto loan comes with higher risk for the lender, so you’ll generally pay a higher interest rate. However, there is no collateral risk to your car if you default.

Now let’s look at some key factors to weigh when considering is an auto loan secured or unsecured the better choice.

Interest Rates and Terms for Auto Loans

One of the biggest considerations when deciding is an auto loan secured or unsecured is the interest rate you’ll pay.

Secured auto loans almost always come with lower interest rates, for two reasons:

The collateral (your car) reduces default risk for the lender.

Borrowers with good credit tend to choose secured auto loans, lowering rates.

Unsecured auto loans represent higher risk, so interest rates are generally higher:

Interest rates on unsecured auto loans often start at 10% or more.

Some lenders charge over 20% for borrowers with poor credit.

The other key factor is loan term length. Secured auto loans allow longer terms up to 84 months (7 years). Unsecured auto loans max out at 60 months (5 years).

The longer term of a secured auto loan means lower payments. But you’ll pay more overall in interest charges over the life of the longer-term loan.

When considering is an auto loan secured or unsecured best for you, look closely at both rates and terms. A 5-year unsecured auto loan at 13% may cost you less overall than a 6-year secured auto loan at 5% interest.

Credit Score Requirements

When applying for an auto loan, your credit score will play a big role in determining whether you get approved, and what kind of rate you qualify for.

As a general guideline:

• Borrowers with excellent credit (690+ score) can qualify for the lowest rates on a secured auto loan from most lenders.
• Those with good credit (640-689 score) may qualify for a secured auto loan with a reasonable rate or an unsecured auto loan with a higher rate.
• People with poor credit (under 639 score) are often unable to get a secured auto loan approved. An unsecured auto loan may be an option but with a very high interest rate.

So when asking is an auto loan secured or unsecured the right choice, consider whether your credit score makes you eligible for the best rates on a secured auto loan. If not, an unsecured auto loan may make more sense.

Down Payment Requirements for Auto Loans

To get approved for an auto loan, most lenders require a down payment of at least 10% for a secured auto loan. Many won’t approve loans for more than the car’s value minus 10%.

With an unsecured auto loan, you may be able to get financing with little to no money down. This flexibility can make an unsecured auto loan the only option for borrowers without enough savings.

When determining is an auto loan secured or unsecured the right fit, think about if you can make the typical 10% down payment for a secured auto loan. If not, an unsecured auto loan may be your only route to getting financed.

New vs Used Auto Loans

New cars almost always require a secured auto loan. That’s because lenders want the collateral to back large loans for expensive new cars.

For older used cars with less value, some lenders are willing to extend unsecured auto loans. The lower loan amounts make them comfortable accepting the higher risk.

So when deciding is an auto loan secured or unsecured the way to go for a used car, you may have flexibility. But for new cars, a secured auto loan is generally the only financing option.

Loan Amount Limits

Speaking of loan amounts, lenders place firm limits on the maximum they’ll finance with an unsecured auto loan.

Many lenders top out unsecured auto loan amounts at $25,000 or $30,000. Some may only go up to $15,000 or $20,000, depending on the borrower’s creditworthiness.

With a secured auto loan, the lender may approve financing up to 100% of the car’s value if you have excellent credit. Loan amounts over $40,000 or $50,000 are common with secured auto loans for more expensive cars.

So when considering is an auto loan secured or unsecured right for your situation, keep loan amount limits in mind. If you need financing above $25,000, a secured auto loan is probably your only option.

Early Payoff and Sale Options

Once you drive a car off the lot after getting an auto loan, you may decide you want something different after a year or two. What are your options for paying off or selling when asking is an auto loan secured or unsecured?

With a secured auto loan, you’ll need to get the lender’s approval before you pay off or sell the car early. They will want to immediately receive the remaining loan balance. This gives them time to release the lien so you can get clear title.

An unsecured auto loan means you keep clear title to the car. So you’re free to sell or pay it off at any time with no lender approval needed.

If you think you may want flexibility to make changes in the first few years of your loan, an unsecured auto loan gives you more freedom and options after deciding is an auto loan secured or unsecured the way to go.

Pros and Cons of Each Auto Loan Type

 

To summarize, here’s an overview of key pros and cons to weigh when considering is an auto loan secured or unsecured the better choice:

Secured Auto Loan

Pros:

• Lower interest rates
• Longer loan terms up to 84 months
• Approval likely for higher loan amounts

Cons:

• Lender can repossess car if you default
• At least 10% down payment required
• Lender approval needed for early payoff or sale

Unsecured Auto Loan

Pros:

• You retain sole ownership of the car
• Little or no down payment required
• Freedom to pay off or sell the car at any time

Cons:

• Significantly higher interest rates
• Shorter maximum loan term of 60 months
• Loan amounts capped at around $25,000

Conclusion: Finding the Best Auto Loan for Your Situation

Only you can determine whether is an auto loan secured or unsecured the ideal match for your budget, credit, down payment, and needs. Follow these tips to find the optimal financing:

Check your credit score so you know where you stand

Research interest rates from multiple lenders, including banks, credit unions, and online lenders

Apply and compare personalized loan offers, terms, and monthly payments

Consider all long-term costs, not just monthly payments or down payment needs

Evaluate your goals and likelihood of wanting flexibility with early payoff or sale

The right option comes down to your personal financial situation. But asking is an auto loan secured or unsecured the better choice for you and understanding their key differences will ensure you get the best possible auto financing.

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