As with all financial products, the best unsecured car loan will depend upon your own financial situation, including your spending and saving habits.
Is it better to get a secured or unsecured car loan?
The main benefit of a secured car loan is that interest rates can be lower. This is because the lender sees this type of loan as less risky, as the car itself or an asset of value is used as collateral. However, if something happens and you can't make your repayments, the lender can repossess the vehicle or asset used as security. This is the main downside.
Benefits of an unsecured car loan
Although borrowers may by charged a higher interest rate on an unsecured car loan, there are advantages to taking out a loan that does not require collateral as security.
Choose the amount you borrow: With an unsecured loan, you can borrow any amount you wish, as long as you prove that you can make the repayments. This amount could include the value of the car as well as other associated costs including insurance fees, registration costs and potentially repairs needed on the car if it is used.
No risk to your property: If you rely heavily upon your car for daily use and don’t want to run the risk of repossession if you cannot make your payments, an unsecured loan could be right for you. Even if you can’t make repayments, you would still have access to your car.
Lower interest rate than other credit: An unsecured loan will most likely charge a higher interest rate than a secured loan, but a lower rate than credit cards or short-term personal loans. If you’re deciding between an unsecured loan and a credit card or short-term personal loan, try creating a table to analyse and compare all fees, charges and rates, so you can make the best financial decision.
Disadvantages of an unsecured car loan
The main disadvantage of an unsecured car loan is that there is a higher financial risk to the lender, so they typically charge higher interest rates and possibly fees and charges.
Higher interest rate than secured loans: Unsecured loans will most often have high interest rates, due to the financial risk associated with giving a loan without security. Also, make sure to investigate all the fees and charges, as this is often where the lender makes money on the loan.
Strict rules on which borrowers qualify: The eligibility criteria is much stricter for unsecured loans than secured as there is no collateral on the loan. Borrowers must have a good credit rating, proof of income and expenses, and sometimes lenders will ask for a deposit to add to security.
Lenders can take legal action: If you do not make your repayments on an unsecured car loan, you will still have access to the vehicle, but could face legal action. Lenders and credit providers can turn your debt over to a collection agency, or file a civil lawsuit to recoup the money that’s owed to them.
