Unsecured Personal Loans for Auto Purchases

It may be hard to see any immediate advantages to using a personal, unsecured loan for any of your auto purchases. However, there are ways this method can benefit you if don't have more traditional options.

 

The Down Payment

 

If you use an unsecured loan as a means to make a down payment, it will serve to offset the depreciation. In addition, you may need more money to secure this down payment if your credit is poor. Down payments will automatically improve your debt-to-income ratio since it will include at least one monthly payment. Keep in mind that your new credit score might take an initial hit after you open an account to borrow money.

 

Unsecured Loans Versus Traditional Financing

 

Before you decide to take out an unsecured personal loan, you should learn what they are and how they differ from secured loans and other financial help.

 

Secured Loans

 

Secured loans mean that some form of collateral is present. In the auto industry, this collateral is the vehicle itself.

 

Unsecured Loans

 

Unsecured personal loans do not have a collateral component. Instead, the buyer signs a promissory note to repay any fees with interest included over a specified time. They can get the title and immediately begin using the vehicle.

 

Benefits of Unsecured Loans

• Using cash, you'll have some flexibility with car dealers

• You won't lose the car if you default

• As the owner, you decide what insurance to purchase

 

Drawbacks of Unsecured Loans

• Interest is higher because there is no collateral

• Chances of approval are slimmer

• The amount you're awarded might not cover all costs

 

Benefits of Secured Loans

• Interest rates are lower thanks to more qualifications

• It's more likely you'll get approved for this one

• Longer repayment times will lower your DTI

• You may be able to get larger loan amounts

 

Drawbacks of Secured Loans

• Your vehicle may be repossessed in the event of a default

• Fewer options for choosing dealers and car brands

• Lenders will insist on expensive insurance options to complete the approval process.

 

Financing Via a Dealer Or a Bank

 

Flexibility is one of the main differences between financing through a dealer or a bank. A dealer is highly-motivated as they only make money when they sell a car. They try to include extras like insurance and warranties in order to make a profit. Banks turn a profit by collecting on loan payments and the interest these payments accrue.

 

Using an Unsecured Loan to Buy a Used Car

 

Unsecured personal loans work better for used cars than they do for new ones. People with limited financial options will usually purchase used cars and like knowing they won't lose their work rides if there is a problem. There are some pros and cons attached to each of these reasons.

 

Poor Credit Ratings

 

Those with poor credit scores will often go for the used car options since they are cheaper. However, the chances for repossession of the vehicle may also be higher.

 

Pros

 

Steady access to your transportation is the main reason to use this type of loan for a pre-owned car. You won't have to worry about losing the car you need for work even if something happens. If you do default, the lender is not allowed to repossess the car. Instead, they are required to file a lawsuit with a lien attached.

 

Cons

 

Approval rates for these kinds of loans, especially when the user has bad credit, are much lower. You can increase your chances of approval by looking at very low-priced cars.

 

Interest

 

Buying a used car means you won't have to deal with the interest rates quite as much, The amount of difference between interest on an unsecured loan, when compared to a secured one, is not huge. A secured lender may not be able to tell you accurate values for the used vehicles as they won't know about maintenance issues or any history of damage to the vehicle. This means these lenders will charge more in interest to offset their potential losses.

 

Private Sales

 

A private seller can make the used car purchase a simple one. They don't deal with the nuances of borrowing and lending and generally just want to get a good price for their car. Someone in the private sector may be willing to do a deal that a secured lender will not, as the private owner may not care about precise values.