Hire purchase is actually classed as an unsecured loan. However, the loan is secured against the car you are looking to buy for a certain amount of time over the loan period. You will not need to use anything other than the car you are purchasing to secure the loan against.
Hire purchase is confusing as many feel that it should be classed as a secure loan, although secured loans are generally against a property that you own. This is an unsecured loan which is borrowed against the vehicle you want to buy.
A secured loan means that the loan is secured against something that you own. Failure to meet the loan repayments can mean that the lender will take possession of the house or car to sell and recoup any losses they have incurred.
An unsecured loan does not require an asset to be used as a form of backup for the lender. The lender relies only on the terms of the contract.
Because there is no security for the lender the amount that can be borrowed tends to be less than a secured loan and the repayment time scale is shorter. The criteria that the borrower needs to meet in order to get the loan will also be tighter.
A secured loan and car finance will have certain advantages.
- You will normally be offered a larger sum of money for a secured loan as opposed to an unsecured loan. This is because there is less risk for the lender
- Loan repayments can be spread over a longer period.
- People with poorer credit ratings will still be able to get a loan as the asset can be claimed if a certain amount of payments are missed.
- Therefore the interest rates can be lower.
- With a bad credit history it can still be possible to get a secured loan as you are less of a risk to the lender.
Advantages of an unsecured loan
- You do not risk losing your home if you struggle to make the repayments.
- You do not need an asset of substantial value to get the loan in the first place.
- The loan can be used for any purpose
