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  • Writer's picturePreston Morris

Unsecured Auto Loans: Reasons You Should Get One

Updated: Aug 31, 2022

An unsecured loan is a loan that doesn't require you to pledge an asset, such as a house or car, as collateral. Instead, approval is based primarily on your credit score and finances. Unsecured loans can be used for almost any purpose.

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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.

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.


The word "secured" in the context of loans typically means that if you do not make the required payments, the lender can take away an item of value. In the automotive lending world that's your vehicle. Most contracts state that missing even one payment can trigger the lender's ability to take the collateral — but in practice, many lenders give borrowers up to two or three payment cycles to get back on track before declaring a loan "in default." The item of value is typically called "collateral," and for car loans, it is typically the car itself.

Lenders prefer for you to make your payments because they may not be able to resell a car for as much as is owed on the loan. However, the ability to repossess the car helps them manage the risk of lending money to others. There are also big consequences for not making your payments — and as a result, secured loans often come with lower interest rates.

Unsecured loans, on the other hand, are loans that are made without collateral. If you fail to pay them, there would still be serious consequences for your credit score, and your debt could be sent to a debt collection agency — but the car wouldn't necessarily be repossessed. Because secured auto loans are the norm, you would most likely need to apply for a "personal loan" if you wanted to use an unsecured loan to buy a car: they are the most common form of unsecured lending.

Looking For an Auto Loan?

CLICK Here For Instant Auto Loan Application!

Unsecured Car Loans: Cons

There are not many downsides to this type of financing, but there are a few things to take note of if you go this route:

  • Timely payments are necessary to keep your credit intact. However, late payments can incur penalties and damage your credit score.

  • Due to the risky nature of unsecured auto loans, there is a possibility that you will pay a higher interest rate.

  • If you default on the loan, your account goes to a collection agency or small claims court.

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