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Traditionally, the item being purchased serves as collateral for loans for expensive items like homes and cars. Lender may use the collateral as payment for the debt if the borrower stops making payments.
There is no need for collateral for an unsecured auto loan or a personal loan used to buy a car. Instead, since there is nothing to be repossessed, creditors can go to court to force collection if the borrower is unable to pay and report the default to the credit bureaus.
How unsecured car loans work
A personal loan used to buy a new or used car is an unsecured car loan. Since the loan is unsecured, if you stop making payments, the lender cannot seize your car. Instead, the lender has the option to sue you and report the default to the credit bureaus.
On the negative side, because there is no collateral involved, unsecured loans typically have higher interest rates and requirements.
Applying for a personal loan is similar to getting an unsecured car loan. You can start by looking for lenders who provide this kind of loan online, and then you can go to lenders’ websites to learn more about the application procedure. Find out if your current bank and neighborhood credit unions provide unsecured loans by contacting them.
Once you have located a lender whose conditions and interest rates are acceptable to you, submit your application and the necessary paperwork.
Documentation typically contains details about your past employment, income, place of residence, debts, and savings. Lenders will also run your credit report as part of the application process. Most lenders have minimum score requirements. Lenders frequently save their best interest rates for borrowers with credit scores of 720 and higher.
Upon approval, the lender will typically send you the full loan amount. You can then use the money from your unsecured car loan to buy the car at the dealership or from a private party with cash.
Benefits of unsecured car loans
So why choose an unsecured auto loan? Kristin Shuff, senior vice president of marketing at LightStream, explains.
“One of the simplest ways to make that simple for people with excellent credit was for someone to not have to do title and additional paperwork, so they can be a cash buyer,” she explains.
According to Shuff, buyers can receive the funds before even deciding which car to purchase. They don’t need the bank to write another check if they decide to buy a different car or deal with a different dealer at the last minute.
“It really gives the client flexibility,” Shuff says. “It would be beneficial for the consumer if they could get a better rate, less paperwork, and more flexibility.” ”.
LightStream does reserve the right to ask for proof that the funds were used to purchase a car, she says, even though it doesn’t have to be aware of the type of vehicle the borrower is buying beforehand.
Where to get larger unsecured loans
Many lenders make five-figure unsecured loans to consumers who qualify. Before comparing other lenders, check with the bank or credit union you currently do business with.
For instance, LightStream provides $5,000–$100,000 unsecured auto loans. Rates start at 5 for those with excellent credit who enroll in autopay. 73 percent to 19. 99 percent as of October 2022. According to Shuff, SunTrust Bank began issuing unsecured auto loans through its online division, LightStream, in March 2013. And PNC Bank makes unsecured loans of up to $35,000.
Normally, large unsecured loans like this should only be used to finance vehicles that cannot be financed by a secured loan. These can include collectibles and antiques.
Credit score requirements vary depending on the borrower, their situation, and the loan, but Shuff advises that applicants should have scores above 680. “The score is not as important to us,” she says. “We look at income and assets. ”.
Secured car loans are easier to get
Qualifying for an unsecured loan generally requires:
Secured car loans require providing collateral to obtain approval. Until the loan is fully repaid, the lender retains the vehicle’s title.
Because the car serves as collateral, banks typically offer better interest rates and more latitude in terms of eligibility for secured loans, according to James Kendrick, vice president of accounting and capital policy for the Independent Community Bankers of America. If the borrower defaults, the bank can recover its funds more quickly.
“It allows more buying power,” he says.
When looking for a car, buyers with excellent credit may have more flexibility by using an unsecured personal loan. You won’t need to amend your application with the lender if you decide to change your mind about the vehicle you want to purchase.
If you’re thinking about taking out an unsecured loan, do your homework first to understand the terms and interest rates that come with this kind of borrowing.
FAQ
Is a car loan considered a secured or unsecured loan?
Car Loan. A car loan is secured by the vehicle you want to buy, so the vehicle is used as security for the loan. If you don’t make your payments on time, the lender may take your car.
How do I know if my auto loan is secured or unsecured?
A secured auto loan is one where the vehicle is used as security for the loan. The borrower repays the loan by paying the agreed-upon principal and interest over a predetermined amount of time.
Can an auto loan be unsecured?
There is no need for collateral for an unsecured auto loan or a personal loan used to buy a car. Instead, since there is nothing to be repossessed, creditors can go to court to force collection if the borrower is unable to pay and report the default to the credit bureaus.
Are mortgages and auto loans secured or unsecured?
Collateral, or assets that you own, is used to support secured debt. Four examples of secured loans are mortgages, home equity lines of credit, home equity loans, and auto loans. Simply put, your lender will inquire about the kind of security you plan to “offer up” to support the loan.