The Risks of Unsecured Car Loans

Unsecured car loans are loans used for the purchase of vehicles that do not require you to put up any form of collateral. These loans can be advantageous, particularly if you have very good credit, but there are 4 risks involved that you should be aware of before making the decision to pursue this kind of loan.

1- Difficult to Obtain at Reasonable Rates

Because the lender is assuming a higher risk in offering an unsecured loan, unless you have extremely good credit, you will most likely face much higher interest rates to offset the risk the lender is taking. This can make the loan too costly to be worth the perceived benefits. These high interest rates can also mean higher monthly payments, a higher risk of defaulting on the loan, and long-term credit damage resulting from the situation, sometimes even bankruptcy.

2- Higher Repo Rate

Because there are less options left for the lender to pursue to collect on the loan, unsecured lenders are more likely to opt for repossession of the vehicle if it appears that there are any signs of difficulty in making the payments. The entire situation can spin out of control rather quickly, and these kinds of loans require caution before proceeding.

3- Assets Can Still Be Attached

Even if you obtain an unsecured loan, if you do not make the payments on the loan, the lender can take you to court and pursue the assets that would have been tied to the loan had you obtained a secured loan. It is vital that you understand both the terms of the loan and the risks before pursuing an unsecured auto loan, because the risk you take can end up costing you a great deal more than you initially bargained on.

4- High Down Payments

Even with the best of credit, most lenders will require a significant down payment, sometimes as much as 25% of the value of the vehicle. This can make it even more difficult to obtain the loan but may also put you in a position where you compromise your cash flow in order to get the loan, placing you at a higher risk for default.

Before applying for an unsecured auto loan, it is important to analyze your finances and have a good understanding of how much you can afford to pay each month for your auto loan. If the down payment and monthly payments will be difficult for you to make each month, you should not take the risk of obtaining an unsecured loan. The payment should fit well within your budget and leave you with plenty of cash flow available every month to cover all of your other debts as well as any contingencies that might arise.

Shop around and be very careful about choosing your lender. Because it is so easy to apply online, it is easy to get caught up in a scam or provide information to an unscrupulous website who could possibly be targeting you for identity theft.

 


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