Unsecured Car Loans

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November 9, 2016

Compare the advantages of unsecured car loans against those of secured car loans.

When an asset-owning consumer is looking to get financing on a vehicle, whether it's new or pre-owned, they will be looking at two basic choices: unsecured car loans and secured car loans. Both of these types of auto loans come with specific issues of liability for the borrower and the lender.

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The secured car loan is where a borrower uses collateral to "back up" a debt. The pros of this approach include a better chance at low interest rates, and an easier process, because the collateral creates "trust" between the lender and the borrower.

An unsecured car loan is when no such collateral exists, and the lender has to grant an auto loan based on the "value" or credit history of the car buyer. In this case, all kinds of issues come up, such as no-credit (where the buyer never had to get a loan before) and bad credit (where past debts make a customer a high risk).

So how do car buyers differentiate between unsecured car loans and secured car loans? Each potential borrower has to take a good close look at their finances to make this sometimes difficult decision.

The analysis begins with a credit report, which a potential car buyer can get from any of the three credit agencies: Transunion , Experian, and Equifax. Then, the consumer can see how this credit score would affect the "average lender" by shopping around for unsecured auto loan rates.

One other issue to consider with secured car loans is that the borrower will have to take out additional insurance on their collateral. If the resulting insurance would be affordable, this is fine. But if, due to some high risk factor, the buyer would end up paying more in additional insurance than on the actual loan's principle and interest, the unsecured loan would be a better idea in most cases.

The unsecured car loan also allows for a case where the borrower cannot pay. In this case, the debt goes to collections and marks up the borrower's credit rating. On the other hand, in a secured car loan situation, the lender can take the collateral from the borrower, which can be a serious liability for that borrower.

If a car buyer knows that they will be able to pay their loan off as intended, a secured car loan can be a great way to get lower rates, but only if the above factors don't threaten to sink the deal. The best bet is to go to trusted lenders and negotiate manageable terms and interest rates for either kind of loan. Also, continuing to work on individual credit ratings will have a great effect on all kinds of future loans and credit situations.


Don't let it discourage right off the bat. Even those with poor credit can find car loan terms for an unsecured loan depending on their specific situation. If you are researching different sorts of loans, the following will take you through the pros of unsecured car loans.

Benefit 1: No Collateral
The most obvious benefit of unsecured car loans is that they do not require collateral to be supplied in order to qualify for a loan. While briefly mentioned earlier, collateral is an item of value which you would normally put against your loan: that is, if you fail to make payments on a loan then your collateral becomes forfeit and may be repossessed by the lender. Since unsecured car loans do not require collateral, nothing of yours will be taken away should your financial situation change and prevent you from making your payments. No collateral loans are of extra benefit to students or others who do not own an item of enough value to put up as collateral.

Benefit 2: Quick Approval Process
The process for getting an unsecured car loan varies by lender, but often takes no more time than a regular loan. You may even be able to find instant unsecured car loans. During the approval process, your credit will be very carefully analyzed; however this can be done quickly and will not cause too much of a time setback.

Benefit 3: Flexible Terms
Unsecured car loans can be financed under many different options, including extended loan terms. You can minimize your monthly payments with a long loan term or pay the loan back quickly for minimum interest rates. Depending on your lender, you should be able to find an unsecured car loan with terms that will allow you to pay it back comfortably as long as you are financially responsible. For those with good credit, additional options such as 100% financing may be available. Most options that are available with a secured loan may apply to an unsecured loan as well.

Benefit 4: Available to (Almost) Everyone
Unsecured car loans are available to people in many different situations. True, it will be much harder to find an unsecured loan with a poor credit score, but it's still possible if you can supply a substantial down payment. You of course will need to fit the basic loan requirements which apply to all loans: be able to supply proof of income and proof of residence.


Just to give two sides of the coin, there are also some specific dangers in pursuing unsecured auto loans. Anyone shopping for an auto loan, regardless of their credit history and assets, would do well to take a look at these issues and make plans to avoid some of the possible fallout from taking on an unsecured auto loan from a lender.

  • High eligibility threshold: Because the lender is inherently taking some risk, unsecured auto loans can be pretty hard to get. Borrowers need to have squeaky clean credit, or the next best thing to it, to get approved for most unsecured auto loans, at least the ones with reasonable interest rates.
  • High interest rates: As mentioned above, those without good credit may get approved for loans carrying very high interest rates. The high interest rate is the lenders hedge against the potential for nonpayment. However, it can also be quite a financial burden on the borrower, as the interest compounds over time and grows the debt to proportions that can sometimes be startling.
  • High chance of repossessions: Because a lender has less options in dealing with an unsecured auto loan, lenders who are nervous about their investment may often quickly resort to repossessing the vehicle in question. Buyers should know this and prepare for it, sending each payment in on time to avoid the repo agent at the door.
  • Potential downside of nonpayment: In an unsecured loan, where the borrower does not have to put up assets, they may not be thinking carefully about their financial responsibilities. If an auto is repossessed, the borrower may start ignoring the debt. This can cause all kinds of problems with credit and wreck chances at future loans.
  • Going through the courts: Another thing that borrowers with unsecured auto loans may not know is that a lender can actually go through the courts, in cases of nonpayment, to pursue the assets that would have been tied to the loan in a secured loan scenario. Buyers who defaulted on an unsecured auto loan may think that their home or other assets are safe, but they are often mistaken, and find out about this through a summons or notice from the legal system.
  • See what kind of interest rates you can get >>

Potential car buyers who do not ignore these perils of unsecured auto loans can reap benefits from them, by studiously applying their knowledge and looking hard at the terms of their loan, making sure that they fulfill their responsibilities and keep the vehicle for a sound investment.

Where to Look for Unsecured Car Loans

When a potential car buyer goes looking for unsecured car loans, experts recommend they go a little further than just the dealer's lot. Consumers looking for a car loan can find financing deals from banks, credit unions, captive finance companies and other sources. But when you are looking to get a loan that is not secured by collateral, it's a good idea to do some basic research including these steps

  • Search for lenders: Shop around and compare lenders including your bank, your employer's credit union, financing companies you may have heard of through word-of-mouth and those with online forms you can find on the Internet.
  • Get access to your credit: Before negotiating with lenders, a borrower should know about his or her credit history, and the credit score associated with it, in order to profit from good interest rates.
  • Ask lenders about their interest rates: One of the most important points in evaluating an unsecured loan is to make sure that the interest rates are fair. Inspect the APR or annual percentage rate that is offered and compare it to others for similar credit scores and similar purchases.
  • Asked about loan policies: Another good piece of research that a buyer can do is to discuss the terms of the loan with the lender to avoid some excess of practices that are related to unsecured loans. Skittish lenders can routinely jump the gun on repossessions, or install engine blocking devices in a vehicle that will shut it down when (or before) payment is overdue. Agree with your lender up front on the way that the loan will be enforced to avoid unpleasant surprises later.
  • See what kind of interest rates you can get >>

These and other aspects of researching a loan can help a buyer feel secure in taking out financing on a vehicle. If you are overwhelmed by the number of resources, how does one go about obtaining the best deal?

Search Online for Unsecured Car Loans

You should begin the process of finding an unsecured car loan by conducting a web search. This will give you different companies from which to select. The lender's site should provide information about how their loans work and whether or not they are truly unsecured loans.

Compare the Qualifications
The details of the loan requirements or qualifications should be the basis for comparison. You should look for those loan offers that do not have any collateral requirement or need for a co-signer.

Most of the lenders will establish a minimum credit score as part of their qualification. The lender may also require that you have no bankruptcies, late pays, judgments, repossessions or foreclosures in your file. You should select a lender who qualifications are the least stringent.

Choose the Best Loan
After comparing the loan offers, you can select the company that offers the best terms. The length of the loan and interest rate you pay will depend on how well you meet the lender's qualifications for the loan, so choose the lender that is willing to work with your situation.

These steps should be helpful in guiding you through the process of comparing unsecured auto loans. Taking your time and doing your research should provide you with an unsecured loan at a reasonable rate and good terms.

Additional Tips After Checking Credit History


  • Allows you to see your current credit risk.
  • You can make inquiries and adjustments if a discrepancy appears.


  • May slow down the loan process.
  • Searching your credit may indicate to the lender that there may be a problem.

Ask for a Lower Amount

A way to demonstrate to the lender that you are responsible is to borrow a loan amount that is less than what is needed to purchase the vehicle through loan financing.


  • Asking for less may put you in the better borrowing position.
  • You may be able to come back and borrow additional money in time.


  • You will need additional resources for any unmet need.
  • You may have to delay your auto purchase.

Negotiate the Loan

You may be able to negotiate a better loan rate and term with the lender by shopping rates or insisting on a lower rate than what is being offered.


  • It strengthens your borrowing position through your willingness to walk away from the deal.


  • The lender may decide to rescind or decline their offer.

Exact Credit Score Knowledge

A score below 650 will lead to a harder time getting competitive financing rates. Scores above 720 are more desirable for lenders, and can get you lower interest rates.

Fix a "No Credit" Situation

Some first-time car buyers don't have any credit history. They've never gone into debt, or borrowed significant sums of money to finance their lifestyles. That's a good thing, but too many lenders don't acknowledge it. Today's financial system seems to reward debt. Someone who is without a credit history can get one eye opening up a line of credit (such as a credit card), using it responsibly to pay off purchases promptly, and thus, show lenders and credit agencies that they are not a credit risk.

Use a Co-signer

Another thing someone can do to get low interest rates on an unsecured loan is to use a co-signer, someone with good credit and stellar work history, to secure lower interest rates. However, the co-signer and the buyer have to be careful they are not tricked into a situation where the co-signer is the primary party for a financing deal. Read paperwork carefully and agree on payment responsibilities if you factor a co-signer into the equation.

Put Down a Large Payment

When you supply a large down payment, it naturally lowers the amount of interest you'll be paying over the term of the entire loan. But for many lenders, a large down payment is also a significant marker of customer responsibility. The reasoning is that those who put down large down payment are much less likely to "walk away" from a debt then those who are frivolously signing onto low monthly payments. Acquiring a larger down payment will help both the borrower and the lender, and lead to lower interest rates for those unsecured loans, where credit risk is always the main factor.

Documentation Requirements

If there is a bankruptcy, it must have occurred at least two years in the past and the applicant must usually have demonstrated good credit history for the most recent two year period. Also, most lenders require that a copy of the bankruptcy discharge papers be submitted with the application. Also, lenders for these types of loans usually require proof of income, employment and residency before loan approval.


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