Unsecured Car Loans: Five Things to Know

Unsecured car loans may sound like something scary, but they're not necessarily a bad idea. Using an unsecured car loan to buy a vehicle is fine, as long as the borrower knows what they're doing. The term basically means that a buyer is not putting up any collateral against the purchase of the vehicle and the loan that he or she incurs. Here are a few things to keep in mind when taking out an unsecured loan.

• Interest rates are fixed for unsecured loans. When you take out a car loan against your credit, there's no fluctuation in the interest rates for the loan. That means the buyer can (and should) carefully plan out the total loan amount, including both interest and principal, to see exactly how much he or she will need to pay every month until the loan is paid off. Then, the borrower can factor this into a budget to successfully complete the terms of the loan.
• You'll need a job. Most unsecured auto loans are based on looking at not just a person's credit history, but their income and current ability to make payments. Without steady income, a lender may be averse to risking a car loan. The general rule for lenders is that a debt should not take up more than 30% of a borrower's income.
• An up to date credit report can help. Many car loan borrowers use their current credit report to negotiate great annual interest rates. Consumers can get copies of their credit reports from the three major credit companies: Transunion, Experian and Equifax. A successful loan applicant will want to receive these scores, read up on them and complete helpful tips for fixing credit if necessary. Then, they can negotiate decent loan terms with either a dealer or a third party lender.
• Late payments mean car repossession. Without any collateral, lenders are quick to issue repossession orders without prompt payment. Buyers should always know where their next car loan payment is coming from, and should not be surprised to find repo agents at their door when payments don't get made on time.
• It's not over until the loan is paid off. Just because there is no collateral, that doesn't mean a borrower can walk away from a loan. Even in the case of vehicle repossession and a write off by the lender (commonly called a charge off), the borrower is still entirely liable for the debt, or at least as much as the difference after the dealer re-sells the vehicle. In unsecured loans, some borrowers fall into the trap of thinking that a mark on their credit doesn't matter, but usually, they find out later that ducking the debt was a bad idea.

Along with these basic guidelines, buyers can help themselves avoid unfortunate circumstances by saving up and making a down payment on a vehicle to minimize the loan amount so that they will not get "snowed under" in an unsecured auto loan situation.