What Is an Unsecured Car Loan?

What Is an Unsecured Car Loan?

When applying for a new loan, you may have heard the terms secured loan and unsecured loan. But, what do those terms mean, and how do they apply when securing a car loan?

In many cases, when someone buys a car using an auto loan, they offer the vehicle as collateral.

In simpler terms, most auto loans are secured loans, where the car being purchased is considered collateral and can be repossessed by the lender if the borrower defaults on paying back the loan. While these types of loans might impose pressure on borrowers, they are generally considered safer for lenders, making them available at lower rates.

However, if you’re worried about using your car as collateral, you can also opt for an unsecured car loan. While this may be rarer, several private dealerships provide unsecured auto loans to applicants with a considerably good credit score.

What Is an Unsecured Loan?

As stated above, you would be required to offer your vehicle as collateral to qualify for a secured loan in most cases. The collateral provides lenders with a way to recoup their losses if you fail to make the payments on time.

However, an unsecured loan is a loan where you are not required to offer your asset as collateral, and there isn’t a risk of repossession of the vehicle if you can’t or don’t make your payments. Instead, lenders offer you the loan based primarily on your credit score. To qualify for this type of loan, you must have a good-to-outstanding credit score.

Because the risk factor involved in this type of loan is usually higher, unsecured auto loans also come with higher interest rates. In addition, if you have a lower credit score, you would likely be required to apply with a co-signer, who would be legally liable to cover your payments in the event you fail to.

While a lender can’t repossess your car if you fail to make payments, they can get in touch with a third-party collection agency and file a case against you to retrieve payments.

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Are Car Loans Secured?

Car loans and mortgages are typical examples of secured loans. In most cases, you’ll only qualify for an auto loan only if you put the car as collateral.

But, there are cases where some dealerships are willing to offer an unsecured car loan. However, you must prepare for higher interest rates, shorter loan terms, and higher monthly payments with unsecured auto loans.

Another thing you might want to consider is your credit score with unsecured loans. Because the rates for these loans are generally higher, you might want to work on your credit score to secure the best rates available.

So yes, the majority of auto loans will be secured. However, lenders are willing to offer unsecured car loans.

Can You Get an Unsecured Car Loan?

Yes, with the right credit score, a sufficient downpayment, and accurate documentation, you can get an unsecured car loan. Several companies like LightStream and Prosper are good marketplaces for unsecured auto loans.

But, the question is, should you get an unsecured car loan?

The benefits are pretty intriguing. With an easy loan process and the freedom to choose any vehicle you want, these loans are perfect for someone with a good credit score and stable income. You would also not be required to offer the car as collateral.

So, what’s the catch?

In reality, these loans are rare and hard to qualify for. Furthermore, they typically come with higher downpayments and higher monthly installments because of the interest rate. Moreover, if you are eligible and default to pay it back, your credit scores will be impacted, and lenders can attempt to recoup their loss through other means.

Of course, there are pros and cons to secured and unsecured auto loans that you’ll need to consider when deciding which may be best for your situation.

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Pros and Cons of an Unsecured Car Loan

Here are the pros and cons of unsecured car loans.

Pros of an Unsecured Car Loan

No Reliance on Dealership Financing

You don’t have to rely on dealership financing with an unsecured loan. This means that you can get the loan from anywhere you want rather than depending upon the dealership to set you up with a bank.

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This can be quite beneficial as you can compare rates and decide the best one. Moreover, you can also avail yourself of military discounts offered by military banks and credit unions.

You Will Receive a Check From Your Bank

When you buy a car using an unsecured loan, the bank will give you the check for the total amount, which you must submit to the dealership. This will allow you to purchase the car instantly and receive the title.

The Amount You Borrow Is Not Limited to the Cost of the Car

The amount you borrow from the bank with an unsecured loan is not limited to the cost of the car, meaning you can borrow more than the cost of the vehicle if you choose to and your lender allows it.

You can use this extra money for other purposes like consolidating debt or paying tuition fees. However, you must only borrow the amount you can pay off and use the borrowed money for necessities.

Your Car Won’t Be Offered as Collateral

One of the reasons most people opt for this loan is that you don’t have to offer your car as collateral. This means that even if you default, your vehicle won’t be at risk of being repossessed by the lender.

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Cons of an Unsecured Car Loan

While the benefits mentioned above are worth considering, there are downsides to these loans.

Higher Interest Rates

Because no collateral is involved, unsecured loans are considered risky by lenders. The increased risk is why lenders charge much higher interest rates. So unless you are ready to pay higher monthly installments, this loan might not be a wise choice.

You Need an Outstanding Credit Score

To qualify for these loans, you will need an outstanding credit score. This is because these loans do not involve offering the car as collateral. Therefore, lenders need to ensure as best they can your creditworthiness and will generally only offer these loans to those with a proven track record.

The Lender Will Still Take Action Against You if You Default

While some lenders might be willing to provide you with an auto loan without the collateral, this doesn’t mean that they won’t take action against you if you default. Lenders will likely contact a debt collection agency or file a lawsuit against you if you default. Moreover, they can also put negative remarks on your credit report that affect your credit score.

Unsecured Auto Loan Rates

Unsecured loans are not loans you can find just anywhere. Therefore, you would have to locate lenders that offer these loans and compare rates.

Organizations like Boeing Employees Credit Union provide unsecured loans of up to $15,000 at a rate between 8.74% to 18%. Also, banks like PNC Bank offer up to $25,000 with about 3-5 year terms.

How to Qualify for an Unsecured Car Loan

As already mentioned, unsecured loans are rarer and harder to qualify for.

However, here are a few things that can improve your chances of being approved for one.

Having Outstanding Credit Scores

The primary requirement for unsecured auto loans is having an outstanding credit score. If you have poor to fair credit scores, you might not qualify.

If you are looking to qualify for an auto loan with a bad credit score, it’s recommended to apply for traditional secured loans. These are easier to qualify for and generally have lower monthly installments and interest rates.

Having Stable Income

Lenders will also review your employment history and ensure that you have a stable income before providing you with an unsecured car loan. Moreover, you would also be required to submit documents like bank statements, etc., to demonstrate this income history.

Having Strong Assets

Another thing lenders may consider is if you have substantial assets, such as a savings account, checking account, and investments. While these won’t be used as collateral, it provides extra assurance to the lender that you have the assets to cover your payments should something happen to your income.

Where to Find an Unsecured Car Loan

Unsecured auto loans might be for you if you have an outstanding credit score and a stable income. You can contact dealerships that offer these loans or other organizations and credit unions that also provide these loans.

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