When you get ready to purchase a vehicle, typically, the auto loan that you apply for is what is called a “secured” loan. What this means is that the bank, dealership or financial institution is using your car as collateral for the loan. The automobile “secures” your credit with the bank or dealership. If you default on the auto loan, the people who extended you the financing have the legal right to repossess your car.
For people who want more flexibility in their auto loan, it is possible for you to apply for what is called an “unsecured” loan. Many financial institutions provide unsecured loans for customers. The terms of this loan are similar to a personal loan or line of credit. You must repay the entire loan within the term set by the loan, including interest, until the loan is completely repaid. However, with an unsecured loan, you car is not considered collateral to the loan. Also, with an unsecured loan, the type or age of the car is not a consideration as part of the criteria for getting the loan. The financial institution is extending you the credit based almost entirely on your personal credit history and credit score.
As you might expect, getting this type of financing is more expensive and typically has more stringent requirements than a secured auto loan. Unsecured auto loan financing, or any type of unsecured credit, is almost always more expensive over the long term than secured credit, because the interest rates are higher. You also usually have to have a better credit rating in order to qualify for this type of loan. However, the up side of unsecured auto loan financing is that you will not be risking repossession of the vehicle if you do not repay the loan. However, your lender may still resort to legal proceedings if you do not repay the loan, so don’t be overconfident. Before you apply for unsecured auto loan financing, make sure you will be able to repay the credit and that it is the best auto loan option for you.