When you buy a car, the most common loan type you see is a secured auto loan. But there is another type – an unsecured loan (much like a credit card) – that can also be used to finance a vehicle. Although not as common, an unsecured auto loan may be an option if you have excellent credit, but if you have bad credit, you more than likely won’t be able to qualify for one.
Auto Loan Options: Secured vs. Unsecured
The biggest difference between a secured and unsecured auto loan is how the collateral (in this case, a car) is handled in the event you default. With a secured loan, if you default, the lender can repossess the vehicle. With an unsecured loan, your car isn’t at risk for repossession because there’s no collateral attached to the loan – an approval is based strictly on your credit.
Both types of loans serve the same purpose – to finance a vehicle. But, an unsecured car loan isn’t for everyone, and most buyers end up taking out a secured loan. Let’s look at the pros and cons of both:
- Easier approvals
- Lower interest rates
- Can lose your vehicle if you default
- Credit is impacted if you default
- Car isn’t at risk if you default
- Fewer vehicle eligibility requirements
- Higher interest rates and your credit is impacted if you default
- Harder to get an approval if your credit is poor
Where to Get No Collateral Auto Loans
You can get a no collateral auto loan from many traditional lenders. These lenders run a credit check to determine the interest rate and whether or not you qualify for one. Keep in mind that qualifying for an unsecured loan can be very difficult – lenders offer these loans only to car buyers with the best credit. If you’re denied an unsecured loan but still need or want to finance a vehicle, you should consider applying for a secured car loan.
While an unsecured loan may sound attractive, you may end up saving more money in the long run with a secured auto loan. Think of it this way: even if your interest rate isn’t ideal, you can choose to refinance down the road and get a better rate once your credit improves.
The Bottom Line
It is possible to qualify for an unsecured car loan, but if your credit isn’t excellent, you’re going to find it tough getting approved. Instead, you need to consider a secured auto loan, and if you have bad credit you may be wondering where you should start. That’s where we come in.
At Auto Credit Express, we can help match you to a local dealership that has the lenders available to help people who need auto financing. Simply fill out our free car loan request form to get started.