What’s The Difference Between A Secured And An Unsecured Loan?
Let’s be honest: loans are tricky. Quite apart from the fact that they make up an awe-inspiring percentage of our overall financial lives as adults, there’s an entire range of information that must be understood when it comes to the actual terms of the loans we agree to. If you’re working on securing financing for a car loan in Toronto, undoubtedly you’ve already run into a whole bunch of information that can seem completely impregnable at first.
Whether it’s interest rates that are confusing, the fact that the length of loans can vary from plan to plan, what exactly a DTI (debt to income) ratio is, or even just how much financing you can expect to qualify for when you’re working towards your car loan in Toronto, there’s bound to be some aspect of this complicated fiscal process which is going to be tricky to wrap your head around.
We’ve all been there. After all, most of us worked towards securing our first car loan in Toronto when we were just kids, and if we’re being completely honest loans continue to confuse us on some of the finer details of the process.
The Two Main Kinds Of Loan
Not least among the most confusing aspects of the whole situation is the difference between a secured and an unsecured loan. You may have come across the term already as you conduct your own research into getting approved for a car loan in Toronto, or it may be completely new to you. After all, not every loan is going to be either secured or unsecured. There’s a wide range of different plans you can qualify for, and they’re going to differ on this crucial point just the same as they’re going to differ on other, more involved points.
Here at AutoLoans.ca, we understand all too well how complicated the entire process of getting a loan can be. Even understanding it from a safe distance takes some effort, and when you’re involved personally in the loan process for something as potentially seismic as your first car or your first home, emotions can muddy the waters further, making complete comprehension of the process next to impossible for the vast majority of us who aren’t Zen masters.
Car loans in Toronto are no joke: they’re a serious financial commitment, and must be treated as such. With that in mind, we decided to come up with a handy guide that you can use as your companion throughout this convoluted and stressful time.
This article is hopefully going to provide you with a bedrock of data you can use to understand what exactly the difference is between a secured and an unsecured car loan in Toronto. We also hope that this piece will help you decide whether or not the best option for you in your current situation of trying to secure approval for a car loan in Toronto is going to be a secured or an unsecured loan. With that being said, let’s dive right into the topic, and with a little luck by the end, even if you don’t quite understand every nuance of the deal, you’ll have more than enough awareness to be able to carry out your own business from here on.
Secured Vs. Unsecured Loans
The main difference between a secured and an unsecured loan is the concept of collateral. This word may be most familiar to you coming in the context of collateral damage, i.e. with regards to a war or some other conflict.
In those conditions, collateral damage means incidental damage, and is most often used to refer to civilian casualties which occurred as a result of trying to carry out some grander military manoeuvre or other. Given that the civilians weren’t the target but got caught in the crossfire, all the same, collateral is used to refer to the toll they paid for the overall operation.
‘Collateral’ In Context
Collateral when it comes to car loans in Toronto can mean almost the same thing, at least from a broad perspective. Collateral is going to take the form of some sort of item you can put up on your end to ensure that you pay the loan back. Oftentimes, collateral will mean your house or another car. The idea is that if you default on the loan, the lender has the right to repossess whichever item you stumped up to secure the loan in the first place.
Sounds a little crazy, right? Who would risk losing their entire house just to secure a car loan in Toronto? While it does sound a little extreme at first glance, it’s worth looking closer at the subject in order to understand which sets of circumstances may arise that could induce a person to do something like that.
A Quick, Illustrative Story
We’ll start with the easiest example. Imagine you were a perfectly healthy financial citizen who paid his taxes back on time, who took care of his books assiduously, who never missed a payday and who paid back every single one of his commitments as soon as he got them in the mail, whether that was his electricity bill, or whether it was his monthly repayments on a car, or his mortgage. Sounds great, right? As a result of this excellent financial responsibility, you would probably have an awesome credit score, and could look forward to securing the lowest interest rates and the best loan lengths, no matter what the specific offer was on the car loan in Toronto.
Imagine, now, that out of nowhere some unexpected natural disaster struck. Or that stocks in a company he’d invested in tanked because it was revealed the CEO was running the corporation like a Ponzi scheme. Or even that his identity got stolen, and he didn’t notice the problem quickly enough to rectify the financial damage incurred by tons and tons of fraudulent purchases, maxing out every single one of his credit cards and burying him under an avalanche of debt he just had no chance on earth of escaping.
While all of these situations sound extreme, these are conditions that dozens upon dozens of Canadians all across the country are dealing with right now. Identity theft has become ever more prevalent in recent years, as cybercriminals are working fast to outstrip the authorities when it comes to the ability to break into systems that were once thought to be rock solid.
Anyway, no matter which terrible calamity befell our unfortunate example of a buyer, his once-pristine score tanked. Through absolutely no fault of his own, he suddenly finds himself in the Deep Subprime range, as he’s been unable to pay back any of the monstrous debts that got accumulated by somebody else in his name. This is undoubtedly distressing, and in fact can be considered one of the single worst things to happen to a financial adult in today’s society.
If he was looking to secure a new car loan in Toronto, he’d suddenly have to deal with sky-high interest rates and long-term loans, neither of which are ideal situations when it comes to trying to get financing for a vehicle. But recall that our example knows exactly how to manage himself financially, and how much of an obligation he can reasonably take on and repay properly. He knows how to manage his money, and he knows how to balance that with his lifestyle. He’s the ideal financial contributor to society, in other words.
He understands that he’s a reliable person to loan money to, but the people trying to get him secured for approval for a car loan in Toronto don’t. The only thing they can go off of is his credit score, which is in the gutter. So he decides to put up his house as collateral on a loan, in order to secure it. Secured loans incur lower interest rates and more favourable loan terms in general than unsecured loans, for one crucial reason.
When it comes to secured car loans in Toronto, lenders have more than just the buyer’s word to go off of that they, the buyer, will reliably pay back the money the owe. They have legal permission to repossess whatever was put up as collateral by the buyer in the case of defaulting. While it’s not the same as a credit score, it can certainly help to assuage any doubts about unnecessary risk being incurred that may be present in the mind of a lender confronted with a sub-par credit score.
For our example, this is an excellent situation as he begins to rebuild his financial life. He has access to higher borrowing limits on account of the loan being secured, and he can expect to have a helping hand throughout the next trying months, as long as he remembers to pay back the secured loan whenever possible. It must be prioritized over unsecured loans, because if unsecured loans aren’t paid back, he won’t have to give up his car, or his house, or whatever else was put forward as collateral.
Tangible Benefits Of Secured Loans
While secured loans can sound extreme, they can be very useful in certain situations to people who may have been having trouble with their financial life for whatever reason, as we’ve just seen. It can happen to anybody, and it can drop clean out of the sky and ruin all your carefully made plans.
We’re loathe to speak too pessimistically here at AutoLoans.ca, but we don’t believe that we’re doing you any favours by sugar-coating some of the more drastic real-life consequences that can arise from these unfortunate financial environs.
So we can see that if you have a poor credit score, or if you’re in the process of performing credit repair (which is a catch-all term for the procedure of building back up your credit score by applying a few simple techniques consistently and effectively), a secured car loan in Toronto can be a really good option to get you back on your feet.
We hope that it doesn’t sound quite so extreme now that we’ve considered the implications and the reasons you may want to undertake a secured loan, and we also hope that it’s a little clearer in general. It’s one of the most confusing aspects of loans to a lot of people, even those who are already financially savvy, and so we’re delighted to be able to help out with any comprehension we can grant our customers.
By the way, did you know that here at AutoLoans.ca, we don’t discriminate between applications we receive based on credit score? No matter where your current score falls on the spectrum, if you’ve been having a hard time securing approval for a loan, why not pick up the phone and give us a call? We may just be able to help you out.