Unsecured loans are loans issued without collateral. This means that the loan is not given against any property belonging to the borrower. Thus, in the event of a default, the lender cannot recover his dues by taking possession and selling the collateral. A loan without collateral that is meant to finance the purchase of a car is an unsecured car loan.
The lack of collateral makes unsecured car loans a risky proposition for the lender. Lending institutions typically get around this by scrutinizing a potential borrower’s credit history and income record to gauge the probability of his repaying the loan. Thus, if you have a bad credit record, you will find it difficult to get an unsecured car loan. Unsecured car loans also command a higher interest rate to compensate for the risk to the lender.
Benefits
Unsecured car loans have advantages. Because they do not require collateral, unsecured car loans are ideal for people who are reluctant to put their house at risk to buy a new car. Besides, unsecured car loans are usually processed very quickly, making them ideal for people who need the cash immediately
Here are three important things you should do before applying for an unsecured car loan:
1. Obtain a copy of your credit report. Whether the lending institution approves your loan or not will be determined by your credit record. Apply for a credit report and check to see that there are no mistakes in it.
2. Research your options. Different lenders offer different terms for unsecured car loans. If you are looking to take an unsecured car loan, research the market well to assess the terms and rates of different lenders for the best deal.
3. Achieve a low debt-to-income ratio. Debt-to-income ratio refers to the percentage of your earnings that is used to repay debts. Lenders, understandably, prefer to lend to people who use less than 30% of their earnings towards paying off existing loans. You can settle some of your debts to achieve this ratio.
Alisha Delphi holds a degree in Economics and Commerce from USC. She started out as a financial advisor with a bank and has moved on to become a loan consultant with more than ten years of experience. Her key areas are auto title loans, auto pawn and fast cash loans.
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