Finance

Thinking About Car Finance Differently: How a Secured Loan Can Save You Cash  

Close-up of car keys and a stack of 10-pence coins on top of an invoice

While it might seem convenient to take out car finance with your dealership, it can be a better idea to take out a personal loan directly with a bank or via a broker instead before you go to purchase your vehicle.

Need finance to buy a new car? Have you considered using a secured loan? It could be a way to keep your interest payments lower. We explore the pros and cons.

Thinking of purchasing a new car? Your first thought might be to take out car finance with your dealership, which is likely to offer you a loan to buy your car. While it might seem convenient at the time, it might mean that you don’t get the best interest rates on offer. It can be a better idea to take out a personal loan directly with a bank or via a broker instead before you go to purchase your vehicle. This will make you a cash buyer and reduce the amount of negotiation you might have to do with the dealership too.

The benefits of purchasing your vehicle with a bank loan

You won’t need to put down a deposit to buy your car because you’ll already have the funds from your bank loan. Plus, while taking up a dealership finance deal can seem to be the quickest and easiest way to secure borrowing for your new purchase, you may find that the loan comes with a mileage limit that you can’t exceed or risk paying a premium if you do so.

What’s more, you won’t fully own the car until the motor finance is paid off and you could find yourself tied to that motor dealership or finance company for some time. They may contact you to persuade you to update your vehicle for another more up-to-date model with them so that you can continue the relationship and the finance package, although of course you may wish to do so. However, with a separate bank loan, the vehicle is yours and you can sell it on at a later date if you wish to, although you must make sure you continue to make your repayments.

Sometimes with car finance you could also have to pay a penalty to get out of the contract too if you decide to switch to a different loan arrangement elsewhere at a later date.

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Secured or unsecured?

You could take out an unsecured loan to buy your vehicle. However, depending on the interest rate, the monthly repayments could be higher than with a car finance package because you haven’t put down a deposit. Another cheaper alternative could be to use a secured loan to purchase your new car.

A secured loan is so called because it is finance that uses an asset as secutiry for the loan. This makes it a less risky option for the lender than an unsecured personal loan so, depending on your circumstances, you could borrow more over a longer period and at a lower interest rate. With a secured loan you can generally borrow between £15,000 to £100,000 and pay it back over 5 to 25-years, depending on credit checks and your financial status.

In contrast, unsecured finance is not secured on an asset so is a greater risk for the bank and, as such, the interest rates tend to be higher, the amount you can borrow less (£1,000 to £50,000) and the repayment periods shorter – normally between one and five years.

The loan will be secured on your car or your property

However, if you take out a secured loan it does mean that the finance will either be secured on your vehicle or your home, meaning that if you fail to keep up with the repayments, in the worst case scenario the lender could repossess your car or property.

Depending on how much you borrow and over what time frame, you could also end up paying more in interest because you could be paying it back for a longer period of time.

Can I get a secured loan with a poor credit rating?

It can actually be easier to qualify for a secured loan if you have a less than ideal credit rating as having the loan secured on an asset makes it a less risky proposition for the lender.

Check with your mortgage lender

If you own your own home it might be worth checking with your existing mortgage lender to find out if they could extend your mortgage borrowing or provide an additional secured loan to help you purchase your vehicle.

Always think carefully and get advice before securing a loan to your property.

Written by Piper Terrett, Fluent Money Group

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