Traditionally, loans for big-ticket items – like houses and cars – use the purchased item as collateral. This way, if the consumer stops making payments, the lender can seize this collateral to cover the unpaid debt.
An unsecured personal loan has no collateral. Instead, just like with credit cards, if the borrower can’t pay, creditors can report the default to the credit bureaus and go to court to force collection since there’s nothing to take back. .
How Unsecured Auto Loans Work
An unsecured auto loan is a personal loan used to purchase a new or used car. Since the loan is unsecured, if you stop making payments, the lender cannot repossess your car. The downside of an unsecured loan is that generally interest rates and qualification standards are higher due to the lack of collateral.
Once you have applied for and obtained an unsecured car loan, the lender will usually send you the complete loan proceeds. You can then go to the car dealership or private vehicle seller as a cash buyer using your unsecured auto loan funds.
Advantages of Unsecured Auto Loans
So why opt for an unsecured auto loan?
Simplicity, says Kristin Shuff, vice president of marketing for LightStream. “One of the easiest ways to make things easier for people with great credit was for someone not to have to do title and extra paperwork, so they could be a cash buyer,” she says.
Buyers can put the money in place even before they’ve decided exactly what type of car they want to buy, Shuff says. If they change their mind at the last hour and decide to buy another car or another dealership, they don’t need the bank to write another check.
“It really gives flexibility to the client,” says Shuff. “If a consumer could get a better rate, less paperwork and more flexibility, that’s a win-win situation for them.”
Although LightStream does not need to know in advance what type of automobile the borrower is buying, it reserves the right to ask for proof that the money was used to purchase a car, she says.
Where to Get Larger Unsecured Loans
Many lenders provide non-specific, five-figure unsecured loans to eligible consumers. Check with a bank or credit union you currently do business with before comparing to other lenders.
For example, Boeing Employees Credit Union offers unsecured personal loans up to $15,000 with rates from 7.49% to 18% as of February 2022. And PNC Bank provides unsecured loans up to $20,000.
As a general rule, unsecured loans of this size should be reserved for cars that cannot be financed with a secured loan. These can include collectibles and antiques.
Secured auto loans are easier to get
In general, this guarantee “allows the bank to offer a more favorable interest rate because it is guaranteed by the automobile”, explains James Kendrick, vice president of accounting and capital policy for Independent Community Bankers of America.
“It allows you to have more purchasing power,” he says.
For at least one lender, unsecured auto loans are part of its portfolio of offerings. SunTrust Bank began providing unsecured auto loans through its online arm, LightStream, in March 2013, says Kristin Shuff.
Credit score requirements vary depending on the borrower, their circumstances, and the loan, but applicants must have a credit score above 680, says Shuff. “The score is not as important to us,” she said. “We look at income and assets.”
The bottom line
Using an unsecured personal loan to buy a car can be an attractive option for some borrowers. Although unsecured loans generally have higher interest rates than loans secured by collateral, if you have a high credit score, you may be able to find a personal loan at a reasonable rate. To verify car loan rate to find the one that’s right for you.