Getting a car loan can be a hassle. Since someone else owns the car while you’re paying off the loan, there are certain requirements you have to meet to purchase and maintain the car. Unsecured auto loans may be a better alternative.
If you have a stable income and excellent credit, it might just be more comfortable with eschewing the normal car loan process altogether.
If you don’t want to deal with lender stipulations, an unsecured auto loan might be worth considering. But you need to do your homework before you start looking.
Here are five factors to consider before purchasing an unsecured auto loan.
1. The car is yours free and clear
Since the loan is unsecured, you won’t have to put up the car as collateral in case you default. You’ll also own the title outright, regardless of what happens to the loan.
Of course, you should pay off the loan on time to avoid damaging your credit score. But you don’t have to worry about the lender repossessing your car if you fall on hard times and can’t afford to make the payments.
2. You don’t need full insurance coverage
When you’re financing a car, the lender has to protect their investment. As such, they will typically require that you have full insurance coverage on the car — liability, personal injury, collision, and comprehensive coverage.
“Even if you pay more interest, you may save more this way”
If you own the car outright, however, you’re not required to get anything beyond liability coverage. As such, dropping collision and comprehensive coverage could save you money.
“Even if you pay more interest, you may save more this way,” says Corey Vandenberg, a community banker. “Depending on driving history and risk factors, this could very well be $100 a month more.”
That said, consider whether or not you should have full coverage. If the car is inexpensive or you have enough cash on hand to cover any major damages that might occur, you could be better off going with the minimum required by your state.
If, however, losing the car to a crash or dealing with major damages would financially cripple you, it might be worth spending a little more now to have the peace of mind.
3. Your interest rate might be higher
Loans that are secured with collateral typically offer lower interest rates because they can take the collateral if you default. In other words, there’s less risk, so the lender doesn’t have to make up for it with higher interest rates.
With an unsecured auto loan, lenders might increase the interest rate — even if you have excellent credit — to compensate for the added risk of having no collateral.”
With an unsecured auto loan, lenders might increase the interest rate — even if you have excellent credit — to compensate for the added risk of having no collateral.
Some lenders buck this trend and offer interest rates on their unsecured auto loans that can compete with that of secured car loans. For example, LightStream offers extremely low-interest rates if you have good or excellent credit and a stable income.
As with any loan, compare multiple lenders to get the lowest interest rate possible.
4. Not limited to the vehicle value
“My tip is always to borrow a little more than you need to purchase the vehicle,” says Robert Campbell, an analyst at WithumSmith+Brown, an accounting and consulting firm. He adds, “I always figure I need a few hundred dollars of the extra do-it-yourself type of repairs.”
My tip is always to borrow a little more than you need to purchase the vehicle,” “
This is especially a good idea if you’re buying a fixer-upper. Also, keep in mind that you’ll need to cover the cost of sales tax and registration. Be sure to borrow enough to pay for those.
5. The loan isn’t as easy to get
Secured car loans are easy to get because there’s little risk involved. Some auto lenders are more than happy to lend to people who have defaulted in the past. That’s because they know they can charge a high-interest rate and repossess the car if the borrower ends up not being able to make the payments.
With an unsecured car loan, it’s unlikely that you’ll get approved if your credit is less-than-stellar. The risk is just too great on the lender’s part, especially if you’ve defaulted on loans in the past.”
With an unsecured car loan, it’s unlikely that you’ll get approved if your credit is less-than-stellar. The risk is just too great on the lender’s part, especially if you’ve defaulted on loans in the past.
On top of a great credit score, lenders of unsecured car loans also want to make sure you have a stable income and enough assets to pay the loan.
Should you get an unsecured car loan?
If you have excellent credit and want more flexibility with your car loan, going the unsecured route might be a good option. Although most lenders will charge you higher interest rates, some lenders like LightStream and Prosper offer fairly low rates.
On the other hand, if you have bad credit or want to get the lowest interest rate possible, a secured car loan might be a better idea.
Before making a decision, compare both unsecured auto loans from LightStream and Prosper with secured ones from the top lenders.
With some lenders, you can even get pre-approved to see what your interest rates might look like. This process will result in a soft credit check, which won’t damage your credit score.
As you’re weighing your options, consider what is most important to you. Then, apply for the loan that best suits that need.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.