Is an Auto Loan Secured or Unsecured?

Kelly Boyer SagertUpdated April 14, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Traditionally, you might think of a car loan as one that uses the vehicle as collateral — in other words, a secured loan. Another option exists, however: an unsecured loan where the vehicle isn’t put up as collateral, which is a significantly different type of loan structure.A car loan can either be secured with collateral or unsecured without collateral, and both options can provide you with financing to buy a car. So, what exactly are the differences between an auto loan that’s secured or unsecured, and which is better? Below we highlight the pros and cons of a secured vs. unsecured auto loan to help you determine which one is right for you.

What Is a Secured Auto Loan?

A secured auto loan is financing that helps a borrower buy a new or used car while giving the lender a security interest in the financed vehicle. Lenders may repossess the vehicle as collateral if the borrower fails to make required payments on the secured car loan. The security interest is a lien that holds the vehicle as collateral until the car loan is paid off in full. Lenders — or the lienholder of your secured auto loan — may hold the car title until you pay off the debt.

What Is an Unsecured Auto Loan?

An unsecured auto loan is financing that helps you buy a car without giving the lender a security interest in the vehicle. Borrowers can use this type of loan to buy a new or used car without pledging any assets as collateral. Lenders may offer a higher annual percentage rate (APR) for unsecured car loans because the loan is not secured with collateral, which means the lender may not seize your car in the event of default.

Are Auto Loans Secured or Unsecured?

A traditional auto loan is secured by the financed vehicle, but lenders may also offer unsecured auto loans. Secured auto loans and unsecured auto loans are among the different types of car loans lenders may offer.Within the broad categories of secured and unsecured car loans, some lenders may offer subprime auto loans that are secured by the financed vehicle or unsecured without collateral. A traditional car loan is secured by the financed vehicle, while an unsecured car loan is either a signature loan or personal loan without collateral used for the purpose of buying a car.If you need financing to buy a car, most auto loans require collateral. As mentioned earlier, the lienholder of your secured auto loan may hold your car title until you pay off the debt to remove the security interest.

Secured vs Unsecured Car Loans

When deciding between secured vs. unsecured loans, it’s important to consider the pros and cons of each:

	Pros	Cons
Secured Auto Loans	Because there’s collateral involved, it may be easier to get loan approval due to reduced risk for the lender.	If you default on payments, you may lose the vehicle.
	Because of the lender’s reduced risk, your interest rate will likely be lower than with an unsecured loan.	You’ll need to have your credit checked, and your score must meet lender guidelines. Late payments can negatively affect your score.
	Lower interest rates can mean lower monthly payments.	The value of the vehicle must be verified as high enough to support the loan amount.
Unsecured Auto Loans	No vehicle assessment is needed and, if you default on payments, the car is not directly at risk.	If your credit score doesn’t meet the lender’s standards, the loan may get denied or you may receive a higher interest rate.
	The loan helps you buy a new or used car without giving the lender a security interest in the vehicle.	Unsecured loans typically come with higher interest rates than secured loans.

Here are some of the factors that a lender may consider when deciding whether to approve or deny your secured or unsecured car loan application:

Proof of identity
Annual income
Credit history
Credit check results
Debt-to-income ratio

Here’s a rundown on some of the car loan requirements:

Income

Lenders may check to make sure you have enough income to afford a car loan, and what “enough” means can vary by financial institution. Ways that lenders may verify your annual income can include asking for pay stubs, bank statements, or tax returns.

Credit History

Because past payment history can predict a person’s future actions, lenders may want to see that borrowers have a pattern of meeting their financial obligations. As such, a review of your credit history is typically part of the loan approval process for a vehicle.

Credit Check Results

Results of your credit check can play a key role in determining what interest rate you’re offered. Borrowers with excellent credit may qualify for a 0% APR car loan secured by the financed vehicle.

Debt-to-Income Ratio

Your debt-to-income ratio (DTI) calculates the percentage of your pretax income that goes toward your monthly debt payments. Lenders like to see low DTIs — generally below 36% — because a low DTI reduces their levels of risk, while a higher one can indicate that a borrower is carrying too much debt for their gross income.

How Can I Get an Unsecured Auto Loan?

Here are the steps you may take to get an unsecured car loan:

1. Shop Around for Unsecured Car Loans

With an unsecured loan, seek out lenders that will loan on a car without requiring collateral. Lenders may offer this type of financing as a signature loan or unsecured personal loan.

2. Fill Out and Submit Your Loan Application

You can fill out and submit your unsecured loan application with the lender of your choice. Good credit scores are especially important for unsecured loans because the lender generally makes approval decisions based on the applicant’s financial record and situation. The interest rate may also depend upon the individual’s credit score.

3. Receive Your Loan

Loan approval is never guaranteed, but lenders may approve your unsecured car loan if you meet the lender’s underwriting standards. Just like with secured loans, a lender may want to assess whether you have enough income to make the payments. You may get approved for tens of thousands of dollars in financing if you have excellent credit and a DTI below 36%.

4. Find and Buy a Car

You can find and buy a car using the unsecured loan. The loan can help you buy a new or used car from a dealership or private seller.

Car Financing Options

When shopping for an auto loan, it’s important to assess your options. You’ll want to set your budget before you head out shopping, and it’s also a good idea to check your credit in advance so you have a good sense of where you stand and what your odds of qualification are. This could give you a sense of whether you may need a cosigner. You may shop for car loans from multiple sources. Getting prequalified or preapproved can help you compare rates. Once you have an auto loan offer in hand, it is critical to read the fine print before you commit. Specifically, keep an eye out for your interest rate, the length of a car loan, any fees and penalties, and other key aspects of the agreement before moving forward.If you already have a car loan and are looking to reduce your monthly payments, consider auto refinancing. If you’ve got a more challenging situation, such as an upside down auto loan where the loan amount is higher than the value of the car, it can take more research to find the right lender.

The Takeaway

Auto loans can be divided into two broad types: secured, where the vehicle is put up as collateral, and unsecured, where a borrower’s credit history and financial situation is primarily considered when a lender makes an approval decision. Although the borrowing processes are similar in many ways, there are key differences between secured vs. unsecured auto loans.It’s important to be clear about which type of loan you’re applying for and what will be right for you. If you’re refinancing a car, one option is to fill out a convenient application at Lantern by SoFi to compare offers from lenders in our network.Find and compare auto loan refinance options with Lantern. __________________________________________________________________________

Frequently Asked Questions

What is a secured car loan?

What is an unsecured car loan?

Are secured car loans better than unsecured car loans?

Photo credit: iStock/inakiantonana

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About the Author

Kelly Boyer Sagert

Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.

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