Unsecured Car Loans: Should You Get One?
Updated: Sep 8, 2022
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Some car dealerships make the car buying experience easier for customers by arranging their financing.
But there’s no rule that says you have to get an auto loan from a dealer’s preferred lender.
What’s even more interesting, there’s no rule that says you must use a traditional secured auto loan for a car purchase.
If you have an existing relationship with a bank, this financial institution may offer unsecured auto loans. Unlike a secured auto loan, the car doesn’t act as collateral for the loan.
Essentially, they're unsecured personal loans that are used to purchase a car. It may sound like a great deal, so it's understandable to be cautious for any tricks.
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.
Now, let’s breakdown the pros and cons of both secured and unsecured auto loans.
DIFFERENCE BETWEEN SECURED AND UNSECURED CAR LOANS
Now that we’ve answered, “what is an unsecured car loan,” we’ll move on to the differences between secured and unsecured car loans. With a secured car loan, the lender uses your car as collateral if you’re unable to make a car payment. In an unsecured loan agreement, your car is not considered collateral, and the car cannot be repossessed if the borrower defaults on their payments. There are steps you can take to regain ownership of your vehicle if your car is repossessed due to non-payment, but an unsecured loan ensures that you’re not in danger of that happening. However, most lenders require a cosigner for unsecured car loans, which makes it more difficult for some Glendale drivers to obtain. Other differences between secured and unsecured car loans include:
Typically offer shorter loan terms
Can have fixed or variable rates
Harder to qualify for
Secured Auto Loans
Longer loan terms
Has fixed interest rate
Easier to qualify for with poor credit
An unsecured loan provides security against repossession if you default on a car payment. However, if you have a low credit score or other financial blemishes, you’ll find a secured loan easier to obtain.
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How Can I Get an Unsecured Auto Loan?
With an unsecured loan, seek out lenders that will loan on a car without requiring collateral. They will likely look at factors such as your:
Income
Credit history
Credit check results
Debt-to-income ratio
Here’s more about what lenders may be looking for with each.
Credit
Good credit scores are especially important for unsecured loans because the lender makes approval decisions based on that person’s financial record and situation. The interest rate may also depend upon the individual’s credit score.
Income
Just like with unsecured loans, a lender will want to make sure that you have enough income to make the payments. They’ll likely ask to see the same sorts of proof, such as pay stubs, bank statements and/or tax returns.
Assets
Because the vehicle is not put up as collateral for an unsecured loan, the asset (the car) does not need to be assessed as part of the loan process and can’t be directly taken if payments aren't made. That said, defaulting can still hurt your credit score and remain on credit reports for seven years.
Looking For an Auto Loan?
CLICK Here For Instant Auto Loan Application!