To begin with, unsecured loans for cars are not common. It is rare to come across lenders who agree to finance your vehicle purchase without collateral. So while secured car loans are something that you can easily get from any lending institution, there are only a select few who agree to approve a loan for car purchase without collateral.
What Exactly is an Unsecured Car Loan and How Does It Work?
As the name goes, unsecured car loans do not have any collateral attached to it. If the borrower fails to pay, the creditor will approach the credit bureau and report the default.
Since no asset backs the unsecured car loan, the lender cannot repossess the car if the borrower defaults on the payment.
Benefits of an Unsecured Car Loan for a Borrower
Listed below are the advantages of opting for an unsecured car loan.
No Collateral
Collateral is a security that the borrower pledges to the lender as a surety to pay back the loan. Since there is no collateral here, the lender has no right to sell or take possession of the collateral and recover the unpaid loan amount in the case of a default.
Tenure Flexibility
The borrower is free to negotiate the repayment terms and conditions according to his paying capability. Some lenders will also agree to extend the tenure if required.
Not Bound to Rely on Financing by the Dealer
You don’t have to depend on the dealer to arrange for finance. You are free to get a car loan from any bank of your choice. This saves you from the financing terms set by the dealer. You can compare the rates and terms of several lenders and then choose what best works for you.
Flexible Interest Rate
The borrower has some flexibility in choosing from a variable or fixed interest rate. Borrowers with a good credit score may also be eligible for a low interest rate.
Fast Approval
Since the documentation requirements are comparatively lesser than secured loans, the disbursement is faster. All that the lender checks for is the credit history, current income, and credit score of the borrower.
No Eligibility Criteria
Since there is no collateral involved, unsecured car loan lenders are not concerned about the car model, condition, mileage, etc., you wish to purchase. You are thus free to choose the car that you want.
No Borrowing Limit
There is no limit on how much you can borrow. You may also borrow more than the value of the car. This flexibility is not there in a secured car loan.
Who Qualifies for an Unsecured Car Loan?
An unsecured car loan sounds tempting, but not everyone qualifies for the same. Since it is a risky business for the lenders, there are strict criteria on eligibility criteria.
Credit Score
You need an excellent credit score to get the unsecured car loan approved. You can check your current score from any reputable credit bureau in Australia before applying for a loan.
Income and Employment
High income and stable employment is a factor that lenders closely consider before approving the unsecured car loan. They look for a long employment record, and some lenders also have a minimum income requirement in place. Take care to note that unsecured car loans draw a higher interest rate and thus high monthly EMIs.
Things to Keep in Mind
- It pays to hunt a bit to get the best deals on your unsecured car loan.
- Access your credit history first before you start asking around for a loan.
- Compare several lenders to check for the best pricing and flexible terms.
- Online platforms are a great way to compare and purchase unsecured car loans.
Choose the Best Unsecured Car Loan
Research well to narrow down to a company that offers the best price and terms on your unsecured car loan. If you meet the loan qualifications, then there is scope for negotiation on the interest rate and loan tenure. It pays to deal with a lender who is flexible with the repayment terms.
While unsecured loans are a great financing option, one should be prepared to pay a higher interest rate. The loan amount does not have any collateral, but that does not mean that the borrower can default and go scot-free.
Defaulting on the loan amount would lead to a forced collection. It will also black mark the individual lowering their credit score. This will make it difficult to get loan approval in the future. However, unsecured loans are a great option if you have a stable income and an excellent credit score.