Unsecured auto loans: What you need to know
Quick insights
- Unsecured auto loans are considered “unsecured” because your car is not used as collateral in case of loan default.
- You may face stricter approval requirements for an unsecured loan compared to a secured auto loan.
- Unsecured auto loans may come with higher interest rates and monthly installments.
Thinking about getting a car but don’t have the financial means to purchase one in cash? You may be considering applying for an auto loan—but did you know there are different types of loans that can impact your borrowing experience? Below we will discuss unsecured auto loans, what they are and what you need to know.
What is an unsecured car loan and how do they work?
An unsecured car loan is a type of personal loan used to purchase a car. It is considered unsecured because the lender cannot use your car as a form of collateral if you were to no longer make your payments.
Unsecured car loans generally come with higher interest rates and may have stricter requirements to qualify for the loan. They are typically offered by lenders like banks and credit unions.
Unsecured car loans vs. secured car loans
Below are some key differences between unsecured car loans and secured car loans:
- Unsecured car loans do not allow a lender to repossess your vehicle as collateral in the case you default on your loan, while a secured car loan does, as it requires collateral to “secure” the loan for the lender.
- Unsecured car loans typically have higher interest rates than secured car loans.
- To qualify for an unsecured car loan, you may face more strict eligibility requirements, such as a higher credit score, strong credit history and a solid form of income. Secured car loans may have more lenient approval requirements.
Pros and cons of unsecured car loans
Unsecured car loans may be a viable option for you depending on whether the pros outweigh the cons in your situation. Let’s break down some of these pros and cons below:
Pros:
- Potential for more flexibility and a smoother application process, as you are not restricted to certain makes or models.
- The ability to comparison shop with different lenders to find more favorable terms and better rates.
- No risk of losing your car to repossession if you default on your loan.
Cons:
- Potential for higher interest rates.
- Loan terms may be shorter, making your monthly installments more expensive and harder to pay.
- If you fall behind on payments, you could risk other consequences, such as hurting your credit score or the potential for your lender to sue you for not making your payments.
- Potential for higher overall cost of the loan and interest rates.
Where to get an unsecured car loan
Some lenders, such banks and credit unions, offer unsecured car loans. You may also consider an online lender, but you should be aware of predatory sites. Make sure you read the terms and conditions before deciding on making the choice to apply for the loan. Remember, many lenders could require a higher credit score and have more stringent qualifications to be approved for an unsecured loan.
Conclusion
Unsecured car loans may protect you from repossession; however, it’s worth considering the cons of unsecured car loans, such as potentially higher interest rates, before applying. It can be helpful to have a higher credit score and strong credit history to help improve your chances of getting approved for an unsecured car loan. Whether you decide to apply for an unsecured auto loan or a secured auto loan, remember to review the terms and conditions of the loan before you pursue this type of loan and practice responsible credit management.
