Unsecured Auto Loans

An unsecured car loan is a personal loan that is used to purchase a new or used car. Since the loan is unsecured, if you stop making payments, the lender cannot repossess your car.

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What is an unsecured auto loan?

An unsecured loan is a loan that does not require collateral. Instead, approval is dependent on the borrower’s credit history. So, an unsecured auto loan is a loan for a car that is not secured by any collateral but by the individual’s financial record.

How do auto loans work?

Auto loans are typically secured loans that charge simple interest, interest calculated on your loan balance, over two to seven years. Your auto loan interest rate is determined by your credit score, loan term and amount, along with the value of the car itself.

While many buyers shop for a car loan at the same time they’re shopping for a car, a better way is to compare annual percentage rates (APRs) across multiple lenders to make sure you’re getting a competitive rate.

If the dealer can beat it, you’ll know you’re getting a fair offer.

Unsecured Auto Loans: What’s the Catch?

This type of financing might seem too good to be true, but it is possible if you’re able to qualify.

Benefits of an unsecured auto loan include:

No need to rely on dealership financing

One benefit of an unsecured auto loan is that you don’t have to get financing through your dealership’s finance department.

You can get your auto loan from any lender, which includes your personal bank, credit union, as well as online lenders.

Being able to shop for your own financing also means that you’re not stuck to a dealer’s finance terms. You can compare rates and then choose the loan with the most affordable terms.

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Receive a check for the purchase

When you apply for an unsecured auto loan, the bank issuing financing will give you a check for the full loan amount. You’ll then use these funds to pay for the automobile.

Because you’re paying for the automobile in this manner, you’ll own the car outright after paying the dealership and receive the title to the car.

Not limited to borrowing the value of the car

Another benefit of an unsecured auto loan is that the loan amount isn’t limited to the value of the car. There’s also the option of borrowing more than what you’ll actually pay for the car.

Of course, you should only borrow what you can afford.

If you can borrow more, use excess funds for other useful purposes. This might include covering any vehicle repair costs if you’re purchasing a used car.

Or maybe use the surplus to consolidate debt and pay off a high interest credit card balance.

Car isn’t at risk of repossession

Another attractive feature is that the vehicle isn’t at risk of repossession if you default on the loan. Remember, the car doesn’t serve as collateral.

So if you stop making your loan payments, you don’t have to worry about the bank repossessing your automobile.