Personal and Automotive
There are two ways to purchase large items on credit. The first is to use an unsecured line of credit or credit card. These loans have no restrictions on their use, but often have a higher interest rate and the payment structure might not be favorable to paying the item off in a timely manner. A far simpler and often less expensive means to purchase a large item such as household appliances, computers or an automobile is to use a secured loan.
Secured loans for personal and automotive needs are arranged in a format that is beneficial to both the borrower and the lender. The loan is tied to the item itself. This collateral gives the borrower a bit of safety and assurance that you will pay off the balance of the loan in a timely manner. Otherwise you stand to lose the item in question to the lender. You, the borrower, are able to afford items without needing cash and in some cases a down payment provided you're able to make the payments.
The main benefit to you, the borrower, outside of obtaining the item in the first place, is the structure of the loan itself. A secured loan generally uses the item you're buying for collateral. You could use other items for collateral such as life insurance, savings, investments or your home, but in most cases, you can get a loan on a washing machine with the machine itself used as collateral.
Interest rates on secured loans vary. Personal loans and loans on small items generally have higher interest rates than secured loans used to purchase automobiles. The interest rate is a reflection of the lender's safety. With an automobile, the resell value of the car is reasonably close to the amount borrowed. With the washing machine above, the bank would have a much harder time reselling it near face value to recoup their loss, thus the higher interest rate.
Unlike credit cards and some lines of credit, secured loans almost always have a set payment structure and length of contract. This might translate to twelve monthly payments or stretch to seventy-two. The item purchased, the lender, and the terms you set at the time of purchase all reflect the length of the contract, but regardless of the length, at the end of the contract, the loan is paid off and you own the item outright.
Special Financing Offers:
Because secured loans are a lower risk to lenders, they are an attractive business. Therefore, the banks often offer special financing packages on certain items. You might find a new computer with no interest for a year or a new car with only 2.9% interest for sixty months. If you are able to take advantage of these specials, a secured loan can net you the item you need with almost no additional cost for lending provided you pay off the item before the special financing arrangements are up.
