A secured car loan is a type of financing where the vehicle purchased with the borrowed funds serves as collateral. This means the lender has the right to seize and sell the vehicle if the borrower defaults on the loan payments. In exchange for this security, lenders typically offer lower interest rates compared to unsecured car loans, making them the most popular choice.

An unsecured car loan is not backed by the vehicle itself. It’s essentially a personal loan with the specific purpose of purchasing a car. If the borrower fails to make repayments, the lender must take legal action to recover the funds. Due to the increased risk, unsecured car loans generally come with higher interest rates, additional fees, and stricter lending criteria.