Auto Loan

An auto loan is a type of secured loan, which means that the borrower must up a valuable item to serve as collateral. If the borrower is unable to pay back the loan, the lender can then seize the collateral and sell it in order to recoup their losses. Since auto loans are used to purchases motor vehicles, the vehicle that is being purchased is what serves as collateral.

If a lender has to seize a borrower’s car due to non-payment of the loan, it is referred to as “repossession.” Until the loan is paid off, the borrower does not technically own the vehicle; the lender does. Once the loan is paid off then the borrower owns the vehicle outright. This is also sometimes referred to as owning the vehicle “free and clear.”

Secured loans are typically less risky than unsecured loans, which do not involve any form of collateral. This means that auto loans typically[1] have much lower interest rates than comparable unsecured loans, such as personal installment loans. However, a borrower’s creditworthiness (their credit score and/or credit report) will still be a factor when taking out an auto loan. The better the borrower’s credit score, the lower the interest rate they can secure.