Many people are surprised there are unsecured car loans available, since most people use secured financing to pay for their cars. Like other secured loans, your lender will have the legal ownership of your vehicle, which is used as collateral here. Therefore, they are allowed to repossess the vehicle if the borrower cannot pay the monthly loan installments for more than 3 months consecutively.
On the other hand, an unsecured auto loan do not require any form of collateral, so the lender have to resort to collection agencies if the borrower defaults on payments. The car ownership and title belongs to the borrower, so there is no risk of repossession. That is why unsecured car loans are only available to people with excellent credit. If you are not sure, just check out the free car loan quote here.
Since the rates on secured car financing is cheaper, most car buyers will choose to use this option instead. So, the lender will hold the car title until you have completed paying off the loan, before the title will be transferred back to you. Furthermore, with so many people having poor credit and low income, secured car loans are the only way to get financing for buying a car.
Legitimate Car Loans For Bad Credit
Legitimate car loan companies will prefer to give secured loans even at the expense of lower interest rates. This is because the risk of car repossession will deter many borrowers from not paying their monthly installments on time. Typically, most borrowers will make sure to pay off their secured debt obligations over unsecured ones, especially when budget is tight. In fact, the default rate is several times lower on secured car loans compared to unsecured ones, even though the borrowers have higher credit scores on average.
In the case of borrowers filing for bankruptcy, lenders for secured car loans will be able to take back the vehicle and covered themselves before the other creditors. Usually, the lenders will not make a substantial loss after repossessing and selling the collateral.
Sometimes, you can only get approved for secured loans to buy a car with bad credit. This is because many lenders will limit the maximum amount you can borrow unsecured for a car purchase. Thus, even if you are willing to pay higher loan rates, you may not be able to find a lender for $100,000 loan to buy a new car.
When Should I Use Unsecured Car Loans?
Sometimes, it is better to take an unsecured loan for buying a car. For example, if you want to borrow $5000 for a cheap car, or you will be trading in your fully paid car for a new one, or putting a big down payment, you may want to take an unsecured loan for peace of mind. There is no need to worry about repossession when the amount you borrow is less than $50,000. So even though the interest rate is higher, the amount you have to pay is capped by the small loan itself.
Secured car loans are the most common form of financing available to help people buy a car, since most likely you cannot pay cash in full unless we are talking about old used cars above 10 years. It is easy to get approved for secured car loans even if you have bad credit. The loan rates are quite low since the loan company holds on to the car title as collateral until you have finished paying all installments.