With the increase in purchase of cars, it has become easier to secure a loan to buy a car. Car loans are usually secured loans given against some collateral, or title loans, which means the car itself stands as surety. But a borrower will have to produce salary slips, income proof, and credit history. But nowadays, there is the option of securing a loan without providing any security. These loans are known as unsecured loans and are given out on the basis of the creditworthiness of a customer. These loans are mostly available with small-time moneylenders or institutions rather than big banks.
For people who cannot produce any security or salary slips, these unsecured loans are beneficial, although they usually come with higher rates of interest but more flexibility.
In the case of an unsecured loan, the risk is higher on the side of the lender. If the borrower defaults or fails to pay back the loan, the ownership of the car will remain with the borrower. For the lender, the options of recourse for recovering the amount from the borrower are limited, but the borrower will be black marked in the credit world.
When looking for an unsecured loan, the down payment plays an important role. Financial experts advise a 20% down payment of the total borrowing. The larger your down payment, the more bargaining power you will have in terms of interest, tenure and other conditions of the loan.
Collateral or security is any asset a borrower can put up to stand as surety that he/she will repay the loan. In case the loan cannot be repaid, the lender/bank has the right to sell off or take possession of the collateral to recover the loan money that has not been paid. In the case of unsecured loans, there is no risk of losing any asset if the borrower cannot repay the loan. This feature is especially beneficial for students or freshers who don’t possess any assets yet.
Since the requirements are lesser than secured loans and there is no security required, the loans are approved and processed faster.
Borrowers can usually negotiate on the repayment term according to their repaying capacity and come to an agreement with the lender. In case of being unable to repay the loan, the borrower can again make an agreement to extend the tenure. This is solely subject to the flexibility of the lender.
The borrower can also negotiate the interest rate and may even have the option of choosing a fixed or variable interest rate.
Unsecured loans have their advantages and disadvantages. The disadvantages shouldn’t be a deterrent. When looking for a car loan, weigh out all your options, check to see which type of loan suits you best. In case you decide to borrow an unsecured car loan, check with your bank to see what options they can give you. If you are looking for a small-time money lender or financial institution, be sure to check the trustworthiness of the lender. Do not be hasty and check for any invisible strings attached. Learn to ask all the right questions about every detail of the loan and the car. Make your dream of owning a car come true in the best possible way.