may be hard to see any immediate advantages to using a personal, unsecured loan
for any of your auto purchases. However, there are ways this method can benefit
you if don't have more traditional options.
The Down Payment
If you use an unsecured loan as
a means to make a down payment, it will serve to offset the depreciation. In
addition, you may need more money to secure this down payment if your credit is
poor. Down payments will automatically improve your debt-to-income ratio since
it will include at least one monthly payment. Keep in mind that your new credit
score might take an initial hit after you open an account to borrow money.
Unsecured Loans Versus
Before you decide to take out
an unsecured personal loan, you should learn what they are and how they differ
from secured loans and other financial help.
Secured loans mean that some
form of collateral is present. In the auto industry, this collateral is the
Unsecured personal loans do not
have a collateral component. Instead, the buyer signs a promissory note to
repay any fees with interest included over a specified time. They can get the
title and immediately begin using the vehicle.
Benefits of Unsecured Loans
• Using cash, you'll have some
flexibility with car dealers
• You won't lose the car if you
• As the owner, you decide what
insurance to purchase
Drawbacks of Unsecured Loans
• Interest is higher because
there is no collateral
• Chances of approval are
• The amount you're awarded
might not cover all costs
Benefits of Secured Loans
• Interest rates are lower
thanks to more qualifications
• It's more likely you'll get approved
for this one
• Longer repayment times will
lower your DTI
• You may be able to get larger
Drawbacks of Secured Loans
• Your vehicle may be
repossessed in the event of a default
• Fewer options for choosing
dealers and car brands
• Lenders will insist on
expensive insurance options to complete the approval process.
Financing Via a Dealer
Or a Bank
Flexibility is one of the main
differences between financing through a dealer or a bank. A dealer is
highly-motivated as they only make money when they sell a car. They try to
include extras like insurance and warranties in order to make a profit. Banks
turn a profit by collecting on loan payments and the interest these payments
Using an Unsecured Loan
to Buy a Used Car
Unsecured personal loans work
better for used cars than they do for new ones. People with limited financial
options will usually purchase used cars and like knowing they won't lose their
work rides if there is a problem. There are some pros and cons attached to each
of these reasons.
Poor Credit Ratings
Those with poor credit scores
will often go for the used car options since they are cheaper. However, the
chances for repossession of the vehicle may also be higher.
Steady access to your
transportation is the main reason to use this type of loan for a pre-owned car.
You won't have to worry about losing the car you need for work even if
something happens. If you do default, the lender is not allowed to repossess
the car. Instead, they are required to file a lawsuit with a lien attached.
Approval rates for these kinds
of loans, especially when the user has bad credit, are much lower. You can
increase your chances of approval by looking at very low-priced cars.
Buying a used car means you
won't have to deal with the interest rates quite as much, The amount of
difference between interest on an unsecured loan, when compared to a secured
one, is not huge. A secured lender may not be able to tell you accurate values
for the used vehicles as they won't know about maintenance issues or any
history of damage to the vehicle. This means these lenders will charge more in
interest to offset their potential losses.
A private seller can make the used
car purchase a simple one. They don't deal with the nuances of borrowing and
lending and generally just want to get a good price for their car. Someone in
the private sector may be willing to do a deal that a secured lender will not,
as the private owner may not care about precise values.