Pros and Cons For Unsecured Car Buying Loans

Typically, when a person applies for a loan, he or she has to provide an asset - car, home, or any other resource - as security to be eligible for the loan. An unsecured car loan is a debt taken by the borrower to purchase a car without providing any collateral as security. In this type of a loan, the associated risk of the banks or non-banking financing organisations (NBFCs) of incurring losses is more. If a borrower defaults after availing a secured car loan, the lender has every right to seize his or her car to help recover part of the money that was initially invested. On the other hand, in case an unsecured loan is not repaid by the borrower, the only way a lender can prevent incurring any losses is by approaching the court and forcing the borrower to repay the debt. Due to being such a high-risk investment, unsecured loans are quite difficult to come by.

If you are planning to buy a new or used car and can’t decide whether you want to avail a secured or unsecured loan, you should carefully evaluate the advantages, disadvantages, and risks associated with them. This will help you make the best decision based on your requirements, situation, and convenience.

Advantages of Unsecured Car Loans

This scheme has a number of benefits that you should be aware of if you are planning to avail an unsecured loan while purchasing a car.

• The Car Is Not at Risk in Case of a Default When a person avails a secured car loan, his or her car serves as a collateral that can be used by banks and financing companies to recover part of the outstanding debt. However, if an individual defaults after borrowing an unsecured loan for his or her car purchase needs, the lender cannot seize the car purchased using the loan to recover the money.
• Simple Application Process While the credit score and credit history of a person greatly impacts his or her loan eligibility, the process of application for this scheme is extremely straightforward.
• Quick Access to Funds Since the loan application, approval, and disbursal of this type of a scheme is very simple, an individual can have quick access to funds in order to purchase the car that he or she has always dreamed of.
• Flexible Loan Tenure The biggest benefit of an unsecured car loan is that the borrower has the flexibility to decide and negotiate the term of the loan with the lender. This will not only help the candidate repay the loan easily as per his or her convenience, but will also reduce the allocated risk of the debt.
• Low Interest For Good Credit Score If you have an excellent credit score and credit history, you might be eligible for an unsecured loan with low interest rates. This is an added bonus in such a scenario since you can not only purchase your car without having to pay a high interest rate on your debt, but also don’t need to provide any collateral in order to avail this loan.
• No Eligibility Requirements of the Vehicle A number of secured loans can only be availed if the car qualifies the designated requirements of the lender, such as the condition, make, model, age, mileage etc. of the car. This is done so that the financing company can ensure that they can recover the loan using the car in case the candidate defaults. If you opt for an unsecured loan, the lenders are not usually concerned about which car you are buying since there is no need for any collateral. Therefore, you will have complete freedom to choose the car that you want.

Disadvantages of an Unsecured Car Loan

Similar to every other financial service, this financial plan also has a few points that you should keep in mind before you decide to opt for this loan.

• Loan Amount Might Be Less Banks and other financial services companies earn their profit from the interest paid by the borrowers. However, since is no collateral is required to avail this loan, offering a large sum as loan calls for a huge risk that most of the lenders try to avoid. Therefore, the funds received using this scheme is usually less than compared to that of a secured loan.
• Interest Rates Can Be Higher Since the borrower does not need to provide collateral in order to secure this loan, the lenders often provide the funds at a much higher interest rate to mitigate some of the risk. While the rate of interest offered in this plan is determined by the credit score and credit history of the individual, financial organisations tend to cover most of the charged interest amount upfront through loan application and origination fees.
• Borrower Ends Up Paying More Due to a higher interest rate, a borrower tends to pay more money as equated monthly installments (EMIs). This leads the borrower to pay a larger sum as interest in the long run. Therefore, it is crucial to ensure that the EMI you pay every month is within your budget before you decide to opt for a unsecured car loan.
• Credit Profile May Get Affected If a candidate decides to opt for this scheme but is unable to repay the debt on time, it can negatively impact his or her credit profile. This, in turn, might cause future hinderance while availing another loan.

While there are a number of benefits to an unsecured car loan, it also carries many disadvantages that one should be careful about before deciding to buy a car using this financing plan.