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With the increase in car purchases, securing a car loan to buy a car has become easier. In almost all cases, car loans are secured loans given against title loans or collateral, which makes the car itself a surety.
But as a borrower, you will have to produce your income slips, credit history, and salary slip. However, the story is different today; there is an option to secure a car loan without providing any security.
In this article, you will learn what an unsecured loan is, the benefits, the disadvantages, the difference between an unsecured and a secured car loan, how to qualify for the loan, and how to apply for an unsecured car loan.
An unsecured car loan refers to a loan that doesn’t require collateral before a borrower can get the loan. They are also known as “signature loans” because your signature is all that is needed if you meet the organization’s or lender’s requirements for a car loan.
However, when a lender borrows you an unsecured loan, the lender is at risk because lenders take the risk when loans aren’t collected without collateral. They might use the opportunity to charge high interest rates and good credit.
In an unsecured car loan, if a borrower stops making payments, there is no collateral for the lender to get back the debt. For example, if a person who has taken out an unsecured loan loses his or her job, that person will definitely not be able to pay back the loan.
And when the loan account defaults, the loan’s credit will be affected. Therefore, the lender will have to bear the financial burden. The repayment of the loan can be pursued through a court judgment, but a borrower’s assets can’t be seized or used in replacement of the loan without going through a legal process.
Despite the popular misconception, there is a difference between an unsecured and a secured car loan. One is backed and protected by an asset, while the other isn’t backed and protected by an asset.
Understanding the difference is an important step in financial literacy and can affect your financial health. This difference also affects your borrowing limit, repayment terms, and interest rate.
Below are the key differences between a secured and an unsecured loan:
| Basis for Secured and Unsecured Comparison | Secured Loan | Unsecured Loan |
|---|---|---|
| Definition | It is a loan protected by an asset/equipment. | An unsecured loan isn’t protected by an asset. |
| Borrowers status | A borrower has more risk than a lender because if a borrower is unable to pay back a loan, his or her asset will be taken away. | A borrower has a lower risk because there is no collateral and assets cannot be taken away. |
| Interest rate | The interest rate is low | The interest rate is high |
| Lien usage | Secured loan make of a lien | An unsecured loan doesn’t require a lien |
| Loan Amount | Ability to secure a large amount of money | Ability to secure a low amount of money. |
| Lender Status | Lenders have lower risk because the lender claims the asset if a lender is unable to pay. | Lenders have more risk because an unsecured loan isn’t protected |
As a car buyer, if you are looking for an unsecured car loan, you can easily find deals from credit unions, banks, and finance companies. However, it is a good idea to do some of this research to select the best and most comfortable finance company:
The first thing you should do if you are looking for an unsecured car loan is to search for lenders on the internet and look out for their customer reviews and customer support rate.
Before negotiating, make sure you understand your credit scores and history, as this will help you get a great interest rate.
One of the important things you need to do before securing an unsecured loan is to ensure the interest rate is high. You can check their annual percentage rate and compare it with other similar lenders.
Another important piece of research you need to do is to discuss the loan policies with the lenders to avoid any additional practices unrelated to unsecured loans. And make sure you choose based on your convenience, because this really matters.
When it comes to securing an unsecured car loan, not everyone that applies for the loan is eligible to get the loan. However, we’ve got you covered. Below are some of the qualifications you need to meet before you can qualify for an unsecured car loan:
The first thing you need to qualify for an unsecured car loan is to have a job and earn a high monthly income. This is essential because almost all lenders will verify your employment and income before giving you a car loan.
It is also because an unsecured car loan is riskier, so they need to be sure you are really employed and have income
Lenders also ensure the stability of your income and employment because it is not enough just to be employed.
However, in most cases, some lenders have few qualification requirements because of the high-interest rates.
When securing an unsecured loan, getting qualified for the loan requires great credit history but not necessarily excellent credit. But sometimes, you may not be qualified if you have a negative or low credit history.
However, every lender’s credit score requirements vary, but a great payment history determines great credit.
Having a strong asset is one of the qualifications for receiving an unsecured car loan with any type of lender. But if you have an account with a bank, it will be easier for you to qualify for a car loan.
And having an investment or saving account with a bank makes them confident in your ability to repay the loan at the appropriate time. However, if you are concerned about other financing options, your credit history is your asset and makes you qualified.
The first thing you need to do to apply for an unsecured loan, either from a bank or other financing option, is to find out if you are qualified. This is essential because the car and the borrower’s requirements differ with every lender.
Common requirements include having a great credit history, stable employment, income, age limit, and car mileage. In this case, you can walk into a financial center, call lenders, or research online to get information about your eligibility.
When you find a car and are ready to apply for a loan, you must go to the financial center with all these documents and information. These include:
After successfully filling out an application form, either online or physically, you will need to wait for a response.
The team from the financial center will reach out to you with their interest terms and rates. However, this is something you may have known but will be repeated for proper understanding.
After a team has reached out to you after submitting your documents, the executive lender will notify you of their decision regarding whether you are qualified or not.
After approval, your lender will give you a form full of their agreement with you. All you need to do is just review and sign the loan contract.
The loan term, the interest rate, and when you have to pay back the loan are all in the contract, so you should read them carefully.
An unsecured car loan is a good option if you don’t have collateral, and it is possible to get the loan, if you are qualified. The advantages include:
One of the outstanding advantages of an unsecured car loan is that you don’t have to get the loan through your dealership finance department. You can easily get an unsecured loan from any lender.
This doesn’t have to be your bank; you can get it through an online lender or credit union. And one of the advantages is that you can choose any finance option, and you aren’t stuck with any dealer’s financial terms. This is even if you give the loan option with terms you can afford.
Another benefit of an unsecured car loan is that the issuing financial center will give you a check for the amount you want to borrow. Then you can easily take the check to where you want to buy the car. And since you are paying for a car in this process, you will have the car outright.
When borrowing to pay for a car, the amount you will be given isn’t limited to the value of the car you want to buy. This gives you the option to pay for the car’s actual amount.
And of course, it isn’t a great option to borrow only what you can afford. If you wish to borrow more, do that and use the excess funds for some essential purposes, such as car repairs. Or use the excess to pay off high-interest credit and consolidate debt.
Another big advantage of an unsecured car loan is that it allows anyone to borrow money. Whether you are rich or poor, you can get an unsecured loan without needing any collateral.
If you own an asset like a home but you don’t want to risk it, an unsecured car loan allows you to get a loan without risking any of your assets.
Another amazing advantage of an unsecured car loan is that you can get the loan within a short time and, in some cases, you can receive the money on the day you are approved. This is because there is no collateral to check and an unsecured loan only gives you a small amount.
One of the greatest and most attractive advantages of a car is that your vehicle is at risk of repossession even if you default on the loan. It is important to know that the car isn’t collateral.
So, if you cannot complete your loan repayment on time, you won’t have to worry about the repossession of your car.
Even though an unsecured loan has many benefits, there is also a downside to this type of loan for a car. The disadvantages include:
Even though the car you buy with an unsecured loan isn’t at risk of your financial center’s repossession, there are some consequences of not paying the bank on an unsecured car loan. One of the consequences is that lenders charge a late fee, and if the repayment date exceeds 30 days, you will be reported to credit bureaus, which will lead to a reduction in your credit score.
Unsecured car loans can be beneficial to borrowers in some cases, but they are riskier for lenders. So, due to this, lenders use the opportunity of not using collateral to increase the interest rate compared to a secured car loan. An increase in interest rates means you will pay more for a car in the long run.
In an unsecured car loan, if you cannot repay your loan before the due date, the lender can take legal action. In this process, the financial center may seek a judgment on your credit history. This may also lead to low credit scores and may last for up to seven years.
The following networks are some of the best lending networks you can reach out to for an unsecured car loan, even if you have a poor credit score.
These lending networks’ services are free, and there is no obligation to get a loan. The process of applying to almost all of these lending networks is easy; it is something you can do from the comfort of your home.
And if you are approved, you can get the loan the same day and drive a new car the same day.
Auto Credit Express is a popular and common lending network. The network was established in 1999, and today, they have evolved, have dealt with several partners, and have closed over $1 billion in deals in an unsecured car loan.
Auto Credit Express doesn’t waste borrowers’ time; you can complete your loan application in a few minutes. However, here below are some of the services and features of Auto Credit Express:
Ally Clearlane is another lending network that can help you easily obtain different financial offers for a loan on a used or new car. They also help you refinance existing loans to reduce repayment, reduce interest, and update the vehicle’s title. However, here below are some of the services and features of Auto Ally Clearlane:
CarLoan is one of the largest financial centers that specializes in unsecured car loans and also offers options for borrowers with bad credit. You can easily get your car loan within a few minutes of approval.
You can be qualified for a car loan in a few minutes by completing a loan request. And after a successful submission, the team will contact you for the details and loan process. Below are the features and services of a car loan:
MyAutoLoan is a lending network that offers applicants any kind of loan, either secured or unsecured. They allow applicants with poor credit and bankruptcy to apply.
What makes MyAutoLoan greater than other loans is that you can get up to four loan offers from lenders that are happy to lend you money in just a few minutes.
And in this case, you can review the loan details before selecting one that fits your needs. Below are some of the additional services and features they offer:
If you are considering choosing an unsecured car loan, it is a good option because they have their advantages and a few disadvantages.
However, it is good to look around and see what the lending networks have to offer and check client reviews before borrowing from them.
You must also take your time to read any application or contract forms before you fill them out or sign them. This will let you weigh the pros and cons of each lending network and choose the best one.
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Offers shown here are from third-party advertisers. We are not an agent, representative, or broker of any advertiser, and we don’t endorse or recommend any particular offer. Information is provided by the advertiser and is shown without any representation or warranty from us as to its accuracy or applicability. Each offer is subject to the advertiser’s review, approval, and terms. We receive compensation from companies whose offers are shown here, and that may impact how and where offers appear (and in what order). We don’t include all products or offers out there, but we hope what you see will give you some great options.
Yes, a lending network can charge you in court if you default on your loan payment and suddenly stop making payments.
Yes, because this is one of the important requirements to qualify. The check is one of the standard loan processes. But, in case, you don't want them to check your credit score or know about your credit history, you can go for a no credit check car loan.
Absolutely yes. Most car loan lenders are ready to give you a loan for anything as long as your credit, employment, and income status are all in good standing.
To be sincere, none is the best. The best depends on your ability and your wishes. With a secured car loan, lenders give you low interest rates because your collateral will stand in as a replacement for you if you miss the repayment deadline. With an unsecured car loan, lenders give a high-interest rate because you don't have to worry about collateral or repossession if you miss the repayment deadline. Depending on your needs, either of the two loans is a better option.
Yes, an unsecured loan affects your loan credit score, but this is only for the first year; after a year, it goes back to the original score.
If the lender of an unsecured car loan died, the borrower could not be forced to repay the loan. But a legal heir who gets the assets of a person who died has the right to get the loan money back.
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