One option when buying a car is to get a secured car loan. This is a loan in which you provide a collateral for the money that you are being loaned for the car. It can be more or less than the car price, but cannot be more than the item you are putting up as collateral. You may put up a home, a boat, the car or another valuable item. There are advantages and disadvantages to this, which include the following.
It can allow someone with no or bad credit to get a car loan
It can be difficult to get a car loan, especially in a slow economy. Many banks are worried that people will default, and some people simply cannot get approved. A secured car loan is one way that they can get a loan for the car that they wish to purchase. It can also be a great way for people who do not make a lot of money to get approved for a car loan for a more expensive car.
You can use the money for other purposes
The money from the loan is not restricted to the car. You may be able to use it for other needs such as general bills or improvements on your home.
You can get a low interest rates
Much of the theory behind interest rates is that you pay a higher interest rates because of the risk. Because you have put something up as collateral the risk is much lower for the lenders. They will therefore generally give you much more favorable interest rates to you. You may pay a lot less overall with these lower rates. They may also be more flexible with you with the loan with regards to payments or other aspects. You can also help build up your credit as you pay off the loan.
You could lose the collateral if you do not pay the loan
The big risk of secured car loans is that you could lose the item that you placed up for collateral if you miss payments. You may lose more than just the car, for instance. You may even end up losing your home if that is what you put up as collateral. It may get a lien and then get foreclosed. Many will not want to take this chance.
You may buy more than you should
There is a reason that the lender may not approve someone with bad credit or a low income. They may not think that you will be able to afford the payments. With a secured car loan you may be tempted to get more than you really can afford. You may be more likely to default.
Secured car loans come with advantages and disadvantages. Consider all of the different factors when deciding whether this is the right type of loan for you.