Unsecured auto loans represent an alternative method of financing vehicles without tying the car as collateral. While this increases flexibility, it also elevates lending risk and barriers to approval. This guide covers unsecured car loan pros, cons, eligibility standards, and alternatives to help determine if one fits your situation.
What Are Unsecured Auto Loans?
Unsecured auto loans constitute personal loans borrowed specifically to purchase a new or used car. Since no vehicle gets tied to the debt as collateral, they carry the “unsecured” designation and remain distinct from typical car loans.
That key difference introduces unique upsides and downsides to weigh when financing automobile purchases.
How Do Unsecured Car Loans Work?
The process for getting approved for unsecured vehicle financing mirrors applying for other unsecured personal loans:
- Check Credit Score and Eligibility – Unsecured lending depends heavily on applicant creditworthiness. Those with scores below 680 face difficulty qualifying.
- Research Lender Options – Banks, credit unions, online lenders, and even some dealerships offer unsecured auto financing. Compare rates and terms across several to find the best offers.
- Submit Loan Application – Provide background information verifying income, employment, residence, debts, assets, and other financial health indicators enabling loan decisions.
- Get Approved – If approved, funds get disbursed in a lump sum personal loan without restrictions on spending. This allows flexibility in negotiating with any seller once financing secured.
- Purchase Car Outright – Use the loan proceeds to buy a car in cash from any dealer or private party seller. No lien gets tied specifically to the vehicle itself.
Pros of Unsecured Car Loans
Unsecured loans deliver useful advantages traditional secured auto lending cannot provide:
- More Flexible Spending – Funds disperse in one lump sum with no restrictions on where to buy cars from who. Shop across more inventory.
- No Additional Paperwork – Avoid extra hassles filling out car collateral paperwork with lenders leaving ownership uncomplicated.
- Protection From Repossession – No collateral means no asset seizure worries if falling behind on payments. Although increased default risks make lenders more hesitant approving unsecured.
- Option When Secured Loans Unavailable – Poor credit or unique car models sometimes prevent qualifying for regular secured car financing. Unsecured loans represent an emergency alternative possibility in those cases.
READ ALSO: 5 Car Loan Mistakes That Are Costing You Money
Cons of Unsecured Vehicle Financing
However, the lack of security tied to unsecured car loans introduces notable drawbacks as well:
- Stricter Eligibility Requirements – Excellent credit history, reliable income, and low existing debt loads become approval musts to mitigate default risks. Requirements sit much higher than regular car loans.
- Higher Interest Rates – Interest rates on unsecured automobile loans often run 3-5% above secured loan APRs given the elevated risk lenders take on. This equals thousands extra in interest paid over the loan term.
- Shorter Repayment Terms – Unsecured car loan maturity rarely exceeds 36 months with some lenders capping terms at 24 months. This leads to much higher monthly payments.
- No Protection Against Lender Lawsuits – Defaulting on unsecured vehicle financing exposes borrowers to collections harassment, garnished wages, lawsuits, and other aggressive recovery tactics since no car can get repossessed to cover losses.
What Credit Score is Needed?
Due to unsecured loans carrying increased risks, lenders impose high credit barriers relative to conventional vehicle financing – often 680+ FICO and above. Requirements typically include:
- 680+ credit score
- Low debt-to-income ratio (ideally under 30%)
- High income levels
- 5+ years of positive credit history
Some lenders may also require proof of assets, co-signers, or security deposits for those with weaker finances hoping to get approved. Unsecured applicants need demonstrating ultra reliability.
Lender Options for Unsecured Car Loans
Many mainstream banks, credit unions, and online lending marketplaces now offer unsecured installment loans usable for automobile purchases:
Banks – Large commercial banks like PNC, Wells Fargo, and U.S Bank issue personal unsecured loans from $5,000 up to $100,000 for well qualified borrowers.
Credit Unions – Member-owned, not-for-profit credit unions represent another source providing unsecured lending options with potentially lower rates than banks.
Online Lenders – Websites like Upstart, Lightstream, and LendingClub have emerged providing solely online unsecured loan services with quick decisions and funding. Amounts reach $100k.
Some new car dealerships now also help arrange financing from subprime lenders willing to approve unsecured car loans for riskier applicants – albeit with very elevated rates.
Alternatives to Unsecured Auto Financing
Unsecured lending works only for certain borrowers given the high barriers. Those struggling to qualify should consider alternative automobile financing options like:
- Secured Car Loans – Traditional secured vehicle loans requiring the newly purchased car as collateral remain more easily accessible to wider ranges of credit.
- Down Payment Assistance – Programs helping provide down payments for qualifying lower income individuals exist in many states and municipalities, allowing easier approval on secured installment loans.
- Buy Here Pay Here Dealers – Specialty used car lots provide direct financing to subprime borrowers. However, exorbitant interest rates accompany that convenience.
- Personal Loans + Cash Down Payments – Another option is borrowing smaller personal loans (secured or unsecured) for 5-10% down payments rather than full car costs. This allows approval on cheaper secured car financing for the remaining purchase balance.
To Recap
Unsecured automobile loans provide useful advantages like flexible spending, less paperwork, protection against repossession, and financing options for those struggling to qualify for regular secured car loans.
However, make no mistake – the lack of collateral tied to the debt places major risk on lenders. In turn, eligibility requirements sit extremely high along with rates and unfavorable repayment terms.
Carefully assess your budget constraints and borrowing capabilities before pursuing unsecured auto financing. For most buyers, secured lending with the car itself as collateral leads more cost-effective solutions. But informed and creditworthy applicants can leverage unsecured loans unlocking unique upsides.
Frequently Asked Questions About Unsecured Auto Loans
Below find answers to some other commonly asked questions regarding unsecured vehicle financing loans:
Can unsecured loans get approved same day?
Yes, many online lenders like Upstart and Lightstream promise unsecured personal loan approvals within minutes or the same business day when applying online. However, funding the approved amounts into bank accounts takes at least 1-3 days.
Where can I get an unsecured car loan with bad credit?
Those with poor credit scores below 620 will struggle qualifying with most unsecured lenders. Subprime financing arrangements only options but come with interest rates exceeding 20% APR. Better to improve credit first before considering unsecured options.
Can I get an unsecured loan for a classic or antique car?
Since classic cars don’t make good collateral, an unsecured loan represents one of few ways financing their purchase. Unsecured loans for collectible automobiles available but expect higher rates and large down payments required due to associated risks.
What happens if you default on unsecured car loan payments?
Defaulting exposes borrowers to collections calls, lawsuits, wage garnishments, property liens, and significant credit score damage. No assets directly tie to the loan, so lenders take aggressive legal action recovering losses from defaults.
Can I get an unsecured auto loan without proof of income?
Very rarely. Verified income proves crucial assessing ability to repay. Some lenders may approve if applicant has abundance of assets or willing to secure the debt against property. But unverifiable income combined with no collateral represents highest possible risk situations.
Is it possible to get an unsecured car loan through a dealership?
Few dealerships indirectly partner with subprime lenders willing to cautiously lend on an unsecured basis to risky applicants at exorbitant rates exceeding 20% APR. This caters as last resort financing when no other options exist. Expect fees too.
In another related article, Auto Loan Types: Purchase, Refinance and More
