How Unsecured Car Loans Work

In the world of auto finance unsecured car loans are not as easy to obtain as secured loans but are still available to those with good credit. Unlike secured car loans, unsecured ones require no collateral put up against the loan, thus leaving your asset protected. Generally secured auto loans need the car itself to stand as collateral thus making them less attractive as an option.

Unsecured car loans may carry a higher interest rate than secured ones, but not necessarily so. Considering that secured car loans are now available to those with bad credit at high interest rates then some unsecured loans will look inexpensive in comparison.

The interest rate you are offered on an unsecured loan will of course be determined by your credit score, and those with excellent credit scores will still qualify for preferential interest rates. Lenders often portray unsecured loans as the poor cousin to secured ones, as the repayment terms on unsecured car loans are less flexible.

However this is to the advantage of the financially savvy consumer as it is much preferable to take an auto loan over a shorter period to pay it off sooner before the car has depreciated too much in value. The attraction of paying over seven years instead of two makes no financial sense when you are beyond bored of the car after four years. It is better to pay a higher interest rate over a shorter period than to prolong payments unless one really has to.

Secured car loans put the car at risk of repossession whilst unsecured loans do not call for the immediate repossession of the vehicle in the event of a payment default. Missing payments is never recommended on any type of loan as it breaches the contract which was issued in good faith and has a negative impact on your credit score. However in the event of a temporary financial problem the car cannot be repossessed if the loan is unsecured, so the equity built up in the vehicle remains yours rather than the lenders.

If unsecured car loans are used well, in conjunction with a large down payment, then the likelihood of moving forward and being able to purchase a future car with no need for any financing becomes one step nearer. If you can find an unsecured loan which has no prepayment penalties then take it, as by paying more than the agreed monthly loan figure and having it placed towards the principal will help to discharge your loan obligation faster. The monthly figure should remain an affordable one though as if you are struggling to pay too much then the route to debt collection could follow.