Getting a car loan doesn't have to be a nightmare, even with bad credit.

A secured car loan is whereby a buyer pays a down payment and hands over an asset in order to obtain financing for his or her new car. Unlike a typical auto loan where the dealership or credit lender holds a lien, secured auto loans allow creditors to hold on to houses, stocks, and title deeds.

Secured Car Loan

1. When should you apply for a secured auto loan?

1. When you have a terrible credit score

Applying for this type of financing makes sense if your current credit score doesn’t meet the minimum requirement for a bad credit auto loan.

2. There’s bankruptcy in your credit history

Most lenders and car dealerships reject applications from buyers with bankruptcy because they have a high probability of skipping payments. However, lenders that offer secured loans don’t bother to check credit reports.

3. Get a luxury brand model

If you dream of owning a Mercedes but can’t seem to raise enough down payment, you can receive financing by depositing an asset as collateral. It’s easy and fast.

4. You need a car urgently but lack a cosigner

If your current car is on its deathbed due to advanced wear and tear, you’re most likely thinking of purchasing a new one. However, it’s hard to secure financing with a terrible credit score. The good news with secured car financing is that you don’t need a cosigner for credit approval.

2. What are the requirements?

1. Proof of income

Your monthly income has to match your creditor’s minimum requirements to prove your ability to repay on time. Creditors will request to see your pay stubs for the past twelve months to assess your financial situation.

2. Been a local resident for at least one full year

Nine out of ten buyers that need secured financing have terrible credit scores. Debtors with such credit ratings tend to relocate frequently to avoid debt collectors. That’s why credit lenders minimize the risk of default by only dealing with buyers who’ve lived in the same residence for one full year.

3. Proof of identity

Carry your driving license and produce your SSN number for identity verification.

3. What are the benefits of this type of financing?

1. Get the car you want

The credit lender has no say regarding your choice of car. You’re free to drive away in a new or used vehicle.

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2. It’s easy and fast

Secured loans take less than a week to get processed. You won’t need to make any follow-up calls or visit several offices to fill in forms.

3. Short repayment periods

Creditors offer short repayment periods and this is great because you can sell the car for a good price.

4. What are the cons?

1. Collateral asset usually exceeds the value of the car

Credit lenders require you to deposit an asset that exceeds the amount of your car loan. Doing this puts pressure on you to make payments on time. However, when you lose your job, the loss of the collateral asset cannot be compensated by selling your car.

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2. Overpriced interest rates

Credit lenders that offer this service usually exploit buyers with expensive interest rates. Why do they do this? Because the buyers have nowhere to turn to for financing due to their terrible credit scores.

Read: How to avoid underwater auto loans

3. High possibility of hidden fees

Since the credit lender virtually has all the freedom, some impose hidden fees at the end of a repayment period. It’s exploitative because they cannot hand over car keys until you pay every dollar owed.

Bottom line

Secured car loans should be a measure of last resort because the value of your collateral exceeds the loan principal. There’s also no guarantee whether the loan will boost your credit score.