4 Dangers of Taking Out an Unsecured Auto Loan

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Financing a car with no security is a convenience every Texan’s appreciates. If you take out an auto loan in Wichita Falls, Burkburnett, or Iowa Park without pledging collateral, you will own the vehicle outright and not have to fear repossession.

Furthermore, an unsecured auto loan gives you the freedom to choose a car without seeking the lender’s approval. You could even borrow more than the vehicle’s actual price. If you intend to purchase a used car, you could use the extra funds to cover repairs. If your new ride is roadworthy enough, your lender would not care about where you spend the excess cash on.

Then again, not using a security for a car loan is not all roses. Below are the pitfalls of unsecured auto financing:

You Have to Pay for More Interest

man signing a documentWithout collateral, your lender has no financial safety net if you default on the loan. In other words, lending you tens of thousands of dollars is an extremely risky proposition. Naturally, the other party will impose higher interest to make your business worth the trouble. Otherwise, no sane lender will take a huge gamble on you.

A higher interest rate may not single-handedly jack up your monthly auto loan payments. But it will sure inflate the overall cost of your borrowing. While you could use lenders against one another to find a favorable deal if you shop around hard, finding a rate comparable or close to one attached to a secured auto loan is next to impossible.

You May Be Allowed to Borrow Less Money

Being able to borrow more than your preferred vehicle’s cost is one thing, but receiving lots of funds to purchase some of the most sought-after cars on the market is another. It is not unusual for unsecured auto loan lenders to have low loanable amount maximums to avoid digging financial holes for themselves and minimize their losses in the event of a default.

You Need Good Credit

Not being required to pledge security is a privilege given to the most creditworthy borrowers. Unsecured auto loans have little choice but put a lot of faith in FICO credit-scoring models to identify future delinquent customers since they have no collateral to fall back on.

If your credit scores are either poor or fair, your unsecured loan application will likely be rejected quickly. This notion is particularly true if you have a history of paying your auto loan installments late.

You May Absorb a Major Credit Ding for Delinquency

Leading credit bureaus no longer include civil judgments to credit reports since 2017 after these negative items were deemed unreliable in determining creditworthiness.

However, being past due could force the hand of your lender to use a debt collection agency. You might approve of the legal strategies a collection agency can use, but you have to live with them as long as you do not pay what you owe. Ultimately, you would see a “collection” item in your credit file, which could hurt your credit for a long time.

The unsecured auto loan has numerous attractive benefits, but it is not without drawbacks. It is not for everybody, so never underestimate its dangers.

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