Want a more flexible financing solution for your vehicle purchase? Consider an unsecured car loan.
How do unsecured car loans work?
There are two types of car loans: secured and unsecured. When you opt for an unsecured car loan, you’ll have no restrictions on the type of car you purchase or how you spend the money. You can borrow more to cover insurance, additional costs or anything you need. Just be sure you can afford the loan.
An unsecured car loan is a higher risk for the lender because your car isn’t up for collateral, so expect higher interest rates than secured rates. You may also be subject to stricter eligibility criteria, like good credit, but your car likely won’t need to meet any criteria.
Compare your unsecured car loan options
Many auto lenders provide secured car loans only. You may want to click over to the “Personal loans” tab for unsecured loan options that don’t require collateral.
Most personal loan lenders don’t require collateral. Some even offer specialized loans for car purchases.
What types of rates come with unsecured car loans?
You can apply for an unsecured car loan with a fixed or variable interest rate. Each one of these comes with its own pros and cons. Consider your financial situation to see which suits you best.
Fixed interest rate.
This means that the interest rate you pay on the car loan won’t change for the duration of the loan. You’ll know exactly how much you have to pay each month. If your loan term is five years, adjust your budget without worrying about fluctuating costs.
Variable interest rate.
This means that the lender can change the interest rate at any time, depending on factors in the economy. So you could either benefit from low rates or be stuck paying monthly payments you can’t afford.
Three factors to compare on unsecured car loans
The most important part of picking a lender is comparing the loans you’re offered. Here are some quick tips to help you focus your decision:
- Check out the interest rate. Every loan offers a unique interest rate. Even if you have the best credit and a superb history, you may not be eligible for the lowest rates from certain lenders, so save yourself time and frustration by looking for preapproval to compare rates.
- Consider the fees. Does your lender have an origination fee? A prepayment fee? These stack up and add to the total cost of your loan. Find a lender with minimal fees to avoid being nickle-and-dimed before you even set foot in a dealership.
- Find the APR. The APR is the final cost of the loan. It includes the principal, interest and all the fees. By comparing the APR of different lenders, you’ll see how much one loan could cost you compared to another.
The benefits and drawbacks of an unsecured car loan
- You don’t need to provide collateral against your loan, which means the application process is generally faster.
- The loan amount is more flexible because you can use it however you like, including combining uses. For instance, you could take out a larger loan to cover debt consolidation and to finance your car.
- The lender can choose to take your case to court if you default on your repayments.
- The interest rates almost always are higher than secured car loans because there is more risk for the lender.
- Because the loan has a higher risk, you may have to borrow a smaller amount than with a secured loan.
Be cautious of overborrowing
If you borrow more than the cost of your car, be careful not to apply for more than you can afford. Work out a budget to ensure you will be able to afford your repayments. These loans tend to come with higher rates than secured car loans, so take this into account when submitting an application.
Should I purchase any dealer extras?
When you have an unsecured car loan, you can use your funds to purchase more than just the car. Dealer extras can be a good deal if you know what you’re getting and what you want to avoid, and since the cost can easily be covered by your loan, it may be worth getting things done at the dealer for convenience.
Common dealer extras, such as extended warranties and roof racks may not be worth the price you’ll be paying on the lot. Many can be installed after you buy your car, and you may even be able to DIY paint and fabric protection.
Here is a list of common dealer extras our thoughts on if you should opt for it when buying your next car.
- Rustproofing. It may not be worth getting this done at the dealer unless you’re buying a used car. This is because many modern manufacturers will seal the car against wax and keep in under warranty for five to ten years.
- Fabric protection. Generally not worth it. You can buy fabric protector and do the job yourself for much cheaper than the dealer’s price.
- Paint protection. Much like fabric protection, you can do this yourself with a can of wax or have it done later for much less than what a dealer is offering.
- Extended warranty. New cars usually come with a manufacturer warranty, but if you’re buying a used car, opting for an extended dealer warranty can cover any unexpected expenses after your purchase.
- Prepaid maintenance plans. This depends on the car you’re buying. If you’re picking up a clunker or a car with an incomplete owner history, a prepaid maintenance plan may be worth the money. Otherwise, you might want to skip it.
- Extra tinting. Most cars come with some tinting, and it’s usually cheaper to have extra tinting done elsewhere.
- Extra insurance. Most policies, like GAP insurance, that are sold by dealers are usually unnecessary. Unless you’re prepared to pay a premium price for just in case, you may want to skip extra insurance.
- Headlight protectors and towbars. If you know the dealer is offering a good deal, go for it. Otherwise, it’s likely to have them installed aftermarket.
- Nitrogen inflation. Nitrogen inflation does have performance benefits, but you’re unlikely to notice. If you really want it, you can save money by having it done somewhere else.
Bottom line
An unsecured car loan can be a quick way to finance your next vehicle, but it comes with its own risks that you’ll need to understand before you borrow. Compare your rates and read up on personal loans so you can make the most informed decision.
If you’re interested in a traditional auto loan secured by your vehicle purchase, you can visit our page on secured car loans compare lenders.
Frequently asked questions
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