When buying a car, taking out a secured loan is considered the norm. Many people don’t think twice before signing on the dotted line. However, with the emergence of numerous online lenders, we are now seeing more creative and versatile loan products become available. One of them is, you guessed it, the unsecured auto loans.
What is an unsecured auto loan?
An unsecured loan is a loan that does not require collateral. Instead, approval is dependent on the borrower’s credit history. So, an unsecured auto loan is a loan for a car that is not secured by any collateral but by the individual’s financial record.
Now, let’s breakdown the pros and cons of both secured and unsecured auto loans.
Unsecured auto loan pros and cons
As mentioned above, these are loans to purchase a car that is not secured by any collateral.
Compare the pros and cons to make a better decision.
- Your car is not directly at risk if you default on the loan
- The application and approval process is easier
- With excellent credit, you can get low-interest rates
- No vehicle eligibility requirements- pick any car you want!
- Higher risk for lenders can mean higher interest rates for borrowers
- If your credit is poor, you may get denied or get a high interest rate
- If you default on a loan, it will be a negative mark on your credit report and will lower your credit score
Secured auto loan pros and cons
Secured auto loans place the car as a collateral for the loan.
Compare the pros and cons to make a better decision.
- Lower risk for lenders means lower interest rates
- May be easier to get approved
- Credit will still be a factor in the rate you get
- You can lose your car if you default on your payments
- Your credit report will also be negatively impacted if you default on the loan
- Application and approval process is more tedious as assets have to be verified
Why choose an unsecured auto loan?
After weighing these pros and cons, why should you choose an unsecured auto loan? Well, it can be beneficial in a number of circumstances.
1. When your credit is good
For one, if your credit is excellent, you can likely get a low interest rate which is comparable with a secured loan. This takes away one of the primary advantages a secured loan has over an unsecured loan and offers you the benefit of not having your asset used as collateral. It’s a win-win.
2. When you want total freedom choosing your vehicle
Second, when a loan isn’t secured by your vehicle, the lender typically isn’t going to be as concerned about which vehicle you are buying. Many secured auto loan lenders have strict requirements on the cars it will finance, such as the age, make, mileage, and condition.
They want to ensure that they will recoup their losses through the sale of your car if you default on your loan. With an unsecured loan, you will likely have more freedom to choose whichever car you want. However, be sure to check with your lender of choice.
3. When you want an easy loan process
An unsecured auto loan is also a good option if you want your loan processed quickly and painlessly. It is going to require fewer steps, allowing you to get the money transferred to your account in as little as one day.
“By getting the loan first, a consumer can shop as a cash buyer with the opportunity to purchase any vehicle within their budget, says Todd Nelson, Director of Business Development at Lightstream, “Having the cash on hand at the dealership allows the consumer to negotiate confidently and to streamline the purchase process, saving time as well.”
4. When you want to minimize the risk of losing your car
Lastly, personal loans typically have higher interest rates but you are less likely to get your car repossessed with a personal loan. No one ever wants to default on a loan but, as we all know, life doesn’t always go as planned. Of course, if you’re not sure you can afford the payments it is best to avoid getting a loan altogether.
If you do end up in a situation where you lose your job and can’t make the payments, losing your car can make the situation much worse. When you’re out of work, you need a car to go out and look for a job. Then, once you land one, you’ll need reliable transportation to get to and from it. Consequentially, an unsecured loan offers you more protection against this worst-case scenario.
Where can you get an unsecured auto loan?
While not all lenders are offering these loans, there are a few forging the path.
LightStream offers unsecured loans for a wide range of purposes, including a vehicle purchase. Nelson explains, “LightStream was designed to reward those consumers who have great credit by offering a simple, transparent means to borrow money for almost anything. Since financing is unsecured, LightStream underwrites the individual, rather than the collateral.”
The only thing is, you will need to have excellent credit to qualify for the unsecured loans. Eligibility requirements include five years of significant credit history, excellent payment history with no delinquencies, various account types on your credit report, stable and sufficient income, and a few others. If you don’t qualify, you may be offered a secured loan instead. However, if you do, you can land a great deal.
Nelson says, “LightStream allows those consumers who qualify to purchase any car, from any seller, anywhere using our unsecured loan. There are no restrictions on make, model, and mileage, so a LightStream customer can purchase a brand new Ford F-150 or a fully restored 1967 Chevrolet Corvette.”
To get prequalified without hurting your credit score, use SuperMoney’s loan offer engine.
Another option is the lending marketplace Prosper. All loans through Prosper are unsecured and the eligibility requirements are little more lenient than LightStream. But their rates won’t be quite as low either.
Click here to see Prosper’s current eligibility criteria, rates, and terms.
If your credit is good but not quite excellent, Prosper may be a good fit for you. Again, applying won’t hurt your credit score.
Get the best deal on an auto loan
Unsecured auto loans certainly have their advantages. However, it’s always good to shop around to see all the offers on the table. By doing so, you can weigh the pros and cons and choose the best one.
Use SuperMoney’s loan pre-qualification tool to discover what the top auto loan lenders will offer you. By answering a few questions, you’ll get offers from a list of lenders without any negative impact on your credit score.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.