Traditionally, loans for large items such as houses and cars use the purchased item as collateral. This allows lenders to seize these collaterals to pay off outstanding debts if consumers stop paying.
An unsecured car loan — or a personal loan to buy a car — has no collateral. Instead, just like with a credit card, if a borrower can’t pay, the creditor can report the default to the credit bureau and go to court to force the collection, as nothing needs to be withdrawn.
This is how an unsecured car loan works
An unsecured car loan is a personal loan for the purchase of a new or used car. Since the loan is unsecured, the lender will not be able to repossess your car if you stop making payments. The disadvantage of unsecured loans is that the interest rate and eligibility criteria are usually higher due to the lack of collateral.
Once you’ve applied for and approved for an unsecured auto loan, the lender will usually send you the full proceeds of the loan. Using the funds in your unsecured car loan, you can go to a dealership or private car seller as a cash buyer.
The benefits of an unsecured car loan
So why choose an unsecured car loan? Simple, says Kristin Shuff, VP of Marketing at LightStream. “One of the easiest ways to make it easier for people with good credit to do this is to make someone a cash buyer without having to do a title and extra paperwork,” she said.
Buyers can get their money before they decide exactly what type of car they want to buy, Schuff said. If they change their mind at the last hour and decide to buy a different car or dealership, they don’t have to check the bank again.
“It does give customers flexibility,” Shuff said. “If consumers can get better prices, less paperwork and more flexibility, it’s a win-win for them.”
While LightStream doesn’t need to know ahead of time what type of car a borrower is buying, it does reserve the right to ask for proof that the money was used to buy the car, she said.
Where to get a bigger unsecured loan
Many lenders offer unspecified, five-figure unsecured loans to eligible consumers. Before continuing to compare other lenders, check with the bank or credit union with which you currently do business.
For example, starting in June 2022, LightStream will offer unsecured auto loans of up to $100,000 with interest rates ranging from 3.99% to 20.49%. PNC Bank offers unsecured loans up to $35,000.
Typically, an unsecured loan of this size should be reserved for cars that cannot be financed with secured loans. These can be collectibles and antiques.
Secured auto loans are easier to get
Overall, “this collateral allows banks to offer cheaper rates because it’s backed by a car,” said James Kendrick, vice president of accounting and capital policy at the Independent Community Banker of America. “It increases purchasing power,” he said. Say.
For at least one lender, an unsecured auto loan is part of the offer package. SunTrust Bank began issuing unsecured auto loans through its online arm LightStream in March 2013, Kristin Shuff said.
Credit requirements vary by borrower, their situation and the loan, but applicants should have a credit score higher than 680, Shuff said. “Scores don’t matter to us,” she said. “We focus on income and wealth.”
Final result
For some borrowers, buying a car with an unsecured personal loan can be an attractive option. While unsecured loans typically have higher interest rates than secured loans, if you have good credit, you may be able to find a personal loan at a reasonable rate. Check car loan rates to find the one that’s right for you.
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