Unsecured Used Auto Loan

Disclosure: Stilt is a lending company. Nonetheless, we are committed to recommending the best loan products to our readers when their needs are outside Stilt’s loan offerings. 

In most cases, whenever most people opt for a bigger loan, such as a home loan or a car loan, they will have to add some collateral into the mix. It may be a bank account with a decent amount of money on it or any other purchased item that holds quite a lot of value. Needless to say, many lenders prefer to add dome security in the mix so that if someone defaults from the loan, they may still recover their losses.

That being said, not everyone has collateral to bring to the table. Some people rent a house or get a car on lease rather than buy, which is why they do not have any assets they might call their own. In this case, an unsecured loan might come as the better option that still allows you to borrow. However, before you get an unsecured car loan, there are still some things that you might want to learn about first.

What Is an Unsecured Auto Loan?

To put it simply, an unsecured car loan is a loan that does not require you to bring in any collateral. Instead, the approval is based on the credit history of the borrower. As a result, while an unsecured car loan is not tied to any collateral, it is directly tied to the financial record of the individual.

This is why such a loan may have its goods and bads. For instance, if you have a bad credit score, it might be rather difficult for you to get approved for a loan. The same thing applies to getting a car loan without any credit history. The lender will need something reliable to go on in the absence of collateral.

How to Qualify for an Unsecured Used Auto Loan

Qualifying for any kind of unsecured loan is sometimes tricky – but provided you meet the right qualifications, it should be easier for you to have your application accepted. Here is what you will generally need in order to qualify for an unsecured auto loan.

Your Credit Score Is Solid

If you have any expectations of getting approved for an unsecured car loan, then you might want to make sure that your credit history is excellent. If your credit score is low, then you will likely not qualify. That being said, this might also depend on the lender, as each of them has different requirements for the limit.

You’re Well-Employed

Regardless of the type of loan that you are going for, the lender will also be looking at whether you are employed and have a stable income or not. This makes sense. After all, since you are not adding collateral, they need to know that they will get their money back. This is why they are looking at the length of your employment record, only accepting those that have a certain degree of employment stability.

You’ve Got Strong Assets

As long as you have established a good credit history and a stable employment record, the chances are high that you will not need to show any assets into the mix. However, if you do, they will automatically look at you with better eyes. These assets include savings accounts, checking accounts and investments – and while they may not be used as collateral, they will raise the lender’s confidence in you.

Unsecured Auto Loans: Pros and Cons

If you do not have any valuable assets (or simply do not want to risk putting them on the line of battle), then you might want to go for an unsecured loan. That being said, there are still a few advantages and drawbacks that you might want to keep in mind.

Pros

First things first, if you decide to go for an unsecured car loan, you won’t be putting your vehicle at risk in the event that you default. Plus, since there is no vehicle eligibility requirement, you may go for any car you want – you just have to prove that you are in the ability to pay for it.

Since it does not involve as much paperwork, the application process is also very smooth – most of the time, with you receiving it within two days at most. Moreover, if you have a very good credit score, you may easily get a low-interest loan.

Cons

Unsecured loans feature a higher risk rate for the lender. After all, if you default on that loan, they have no legal guarantee that allows them to get their money back. For this reason, precisely, the interest rate is also higher.

Moreover, if you have a poor credit history, then there is a high chance that your request will get denied – or accepted with an even higher interest rate. It will also leave a deep mark on your credit report if you default on your loan.

Secured Auto Loans: Pros and Cons

As an alternative to unsecured debt, you may also want to go for a secured loan. That being said, even if a secured loan is not exactly your cup of tea, you might want to know what you are missing out on – and why unsecured loans are the better alternative.

Pros

Perhaps the biggest advantage for secured loans is that since there is a lower risk to the lender, the interest rate is also much lower. Plus, even if you have a low credit score, the collateral may serve as security for the lender – which means that it might be much easier for you to get approved.

Cons

Secured or not, your credit score will still be an influencing factor on the rate that you get. Plus, if you default, not only will it lead to a great hit on your credit score, but it can also put you at risk of losing the car. The chances are that you might have signed it off as collateral.

Why You Might Choose an Unsecured Used Auto Loan

Some people want to get a loan to buy a new car, whereas some want to buy a used car – mostly because it is cheaper (college students will understand). You will not be paying as much for that car, which means it should be much easier for you to handle the payments. Considering that over 1 million borrowing students end up going into default, it is understandable why they might want to think first before taking the dive.

There are several reasons why you might want to go for an unsecured auto loan – but in most cases, it boils down to the following aspects.

Because You’ve Got Good Credit

You have a very good credit score, and there is a very good chance that you will be accepted solely based on that – so why not take advantage of this opportunity. You already have a high chance of getting a low-interest loan, with or without collateral, so there is no use to put your assets at risk. It will feel like you have to pay for a secured loan – but without all the risk involved.

Because You’re Looking for a Simple Loan Process

While convenient and generally low-interest, there are still some things that we might not like about secured loans – and that’s the fact that they might need a lot of paperwork. Let’s say that you want to go for collateral, and you are planning on putting your new car there. You will continuously have to go back and forth with the signatures and the papers, which can take quite a long time.

However, if the loan is unsecured, you do not have to go through all that zig-zag. The loan process is very simple. You gather your paperwork, get approved – and then start paying. In most cases, it should not take more than one or two days at most. 

Because You Want to Minimize the Risk of Losing Your Car

Finally, the last thing that you want is to lose your car after you’ve spent so much time trying to pay it off. We all start with the intention of paying off our debt – but life never goes as planned, so you might find yourself in the position where your car gets repossessed and you lose every right to it.

Indeed, you’ll have trouble with an unsecured loan as well, if you default. The interest rate will grow, and you will have to pay for certain penalties. However, at least you will not remain car-less, which can be quite convenient if you rely on it. Whatever happens, the car will remain yours, and you may only sell it when you want to – not because someone is repossessing it.

Final Thoughts

Unsecured loans can be quite convenient for many people, regardless of their status. They may be students that want to buy a car, but never actually came in the ownership of any assets to give as collateral. They may also be full-fledged adults that have their own assets – but do not want to put them at risk. No matter the case, an unsecured loan may be slightly more expensive – but if the worst-case scenario happens, at least your assets will be safe.

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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