Secured car loans are the most common form of auto finance for a regular consumer. They are lower cost which is the priority for most when shopping around.
However, an unsecured loan can be used to buy a car if you need that separation between the asset and the lender.
You must be willing to pay for that convenience, as the interest rate is often higher.
In this article, we will discuss when unsecured loans can be a better alternative to a standard secured car loan.
How Unsecured Car Loans Work
An unsecured car loan is just a personal loan used to buy a car, but the vehicle is not used as collateral for the loan.
That means your obligation to the lender starts and stops with your repayments.
There is no recourse against the asset purchased if you default on the loan, and you do not need to inform the lender if you plan on selling the car.
If you do not meet your repayment obligations, then a lender their recovery efforts and any legal action on you, rather than first repossessing the asset.
So there is additional risk for the lender, and also for you in circumstances where you do not repay the loan.
This is why an unsecured car loan would typically attract a higher interest rate, and potentially be harder to qualify for.
Who an Unsecured Car Loan is Suitable For
There are limited reasons why someone may prefer an unsecured car loan.
They are generally most suitable for shorter-term lending than a standard secured car loan, which are typically repaid over 4-7 years.
Short Term Ownership of Asset
Having the freedom to sell without worrying about a lender’s security interest can be beneficial and ensure a faster sale process.
This can be suitable for someone who buys and sells cars as a side hustle, or perhaps to meet a short-term need for a few months.
If you need a car for six months, then you may be able to buy and sell for relatively neutral cost. The interest bill will be much less than renting a car for that long!
Save on Car Loan Fees
A car loan can attract establishment fees that can be expensive. However, this cost is offset by the lower interest rate over the life of the loan.
If you are planning to pay out the loan over a shorter timeframe then a loan with minimal establishment costs and a no early repayment fees would be the most desirable.
You may need strong credit to qualify for this kind of loan, but it may be the cheaper option depending on the length of time you plan on holding the car.
At Gusto Finance we have instant access to over 40 lenders and can find you the most suitable unsecured car loan for your situation in no time.
Get in touch below and our expert brokers will be in touch.
Buying a Vehicle That Won’t Qualify as Security
Lenders have strict criteria on what vehicles they will take as security.
The KM’s on the clock, the value, and the age of the vehicles are all factors where each lender has specific thresholds to meet.
If you want to buy a car that doesn’t meet these standards with any lender then you will have no choice but to choose an unsecured car loan.
Unless the car is a collectible, the value of an old car with high KMs is usually low enough where a personal loan is a viable alternative.
Buying a Car That Needs Funding for Repairs
A car that is either not roadworthy, or barely qualifies and needs a serious upgrade, may not qualify as security – as covered in the previous point.
The additional benefit of an unsecured car loan is you can borrow the purchase price plus an additional amount to fund the planned work.
This is most common with hobbyists that buy old, run down cars, and spend a few months tinkering with it in their driveway.
You can fund the parts needed much easier with a personal loan that with a facility intended to fund a secured purchase, and only that.
Pros and Cons of an Unsecured Car Loan
Benefits:
- Once you have the cash, you can buy a car without the delays that paperwork and loan settlements can cause. Putting you in a strong negotiating position.
- The asset can be sold without involvement from a lender, ensuring a speedy transaction.
- Your vehicle is not under immediate threat if you cannot meet your repayment obligations for whatever reason.
- Flexible use of funds: You can direct a portion of your loan to a purpose other than buying a car.
- Potentially lower establishment fees, depending on your credit history.
- If you select a lender with no early repayment fees you could come out ahead despite the higher interest rate.
Disadvantages:
- No collateral means higher risk for the lender, and the interest rate will be higher to reflect this. Even if you have good credit, expect an interest rate in the teens.
- You may be limited by a lower maximum loan amount. It is common for secured car loans to be upwards of $50,000. Unsecured loans rarely exceed that amount.
- Higher risk also means that a lender will be far more selective with who they lend to. Unless you have a strong credit record and a stable job, you may struggle to be approved.
- You can still lose your vehicle if you do not pay. The lender just has to fast-track legal proceedings to make a claim against your assets.
How to Qualify for an Unsecured Car Loan
Due to the higher risk associated with an unsecured loan, some lenders will only approve those with a strong credit history.
You will still need to show you can service the loan, have reliable income, and pass all other regular credit checks.
The only shortcut is there is no qualifier in terms of vehicle quality that the lender will measure.
If you have bad credit, then your unsecured loan options will be limited to short-term cash lenders. These usually max out at $5k to $10k and attract interest rates close to 48%.
This is not suitable for a car purchase and you will have a much higher chance of being approved by applying for a secured bad credit car loan here.
Conclusion
Cost isn’t everything when it comes to auto finance. The most important element is whether you can be approved for a loan that meets your needs.
The use cases of an unsecured car loan demonstrate just some of these scenarios where a more expensive loan can actually be more beneficial to a customer.
At Gusto Finance, we specialise in tailoring a solution to best suit your needs and getting you that approval fast!
Get in touch below to speak to our team of expert brokers.
