The necessity of borrowing to purchase a car is a fact of life for many who simply do not have the means to buy with cash, yet require a vehicle for work or other reasons. Those who finance a brand new car with a loan will find that their new asset begins to depreciate in value from the moment of purchase, thus leaving them with a potential up-side down loan to repay.
Expensive cars fresh from the manufacturers will almost certainly require security as collateral against the loan. Those opting for a vehicle with less prestige, or an older vehicle, are more likely to be able to secure an unsecured car loan which has certain advantages over a secured car loan.
The attraction of unsecured loans is their availability without providing collateral. Once the loan is approved and the car purchased the car is owned outright by the new owner, rather than remaining the property of the lender until the loan is paid off in full.
Unsecured loans are advantageous as the lender is not granted immediate rights to repossess the vehicle or make a claim against another asset given as security, such as the home. Owning the car outright allows the vehicle owner to sell the car as they choose, though naturally they will still be liable for the agreed repayments. If finances become tight the car owner can elect to sell the vehicle to hopefully cover the cost of repaying the loan in full, rather than wait for it to be repossessed and thus lose the deposit.
As the lender has no claim on the vehicle there is no need to maintain it in a satisfactory manner, as cars purchased with secured loans must be. It is perfectly permissible to drive round in a dirty, scratched vehicle if that is ones choice, answerable to no one except the style police.
Unsecured loans command higher down payments which can be a drawback for some. The terms are stricter than those imposed on secured loans, with a fixed, relatively short period of repayment, thus making the monthly repayments higher.
Although this may be perceived as a disadvantage of unsecured loans, it actually represents a better fiscal choice. A higher down payment builds up immediate equity in the vehicle, whilst a shorter repayment term reduces the depreciation risk. When the loan is paid off in the shorter time frame dictated by unsecured loans, then the owner can put the same amount aside each month towards savings, helping to enable the next car purchase to be made without the necessity of a loan.
The biggest negative of an unsecured car loan is the higher interest rate levied. Without security the lender imposes a higher rate, which can be significantly more than the interest rate on a secured loan. Thus it pays to comparison shop well before selecting a lender, to find the most competitive interest rate.
Another key factor that borrowers should consider before opting for a particular loan is the amount of fees charged and whether early payment of pre-payment penalties are applied. It is always advisable to opt for a penalty free loan, thus allowing overpayment wherever possible to discharge the loan earlier and thus avoid paying as much interest.
Additionally a lower headline interest rate may actually cost more than a slightly higher rate combined with lower fees. The most certain way to secure a preferential interest rate is to ensure ones credit score is excellent before applying for a loan. To help to prevent problems with the monthly payments becoming unmanageable, it is wise to consider the costs of car maintenance and insurance, and factor them into the monthly budget when considering the level of loan.
Whilst taking on any loan can be a burdensome risk, the pros of an unsecured car loan outweigh the con, which can actually be perceived in a positive light if looked at from a sensible economic standpoint. Given the choice the potential car owner has more control with an unsecured loan than with a secured one, particularly if it is possible to discharge the loan early.