Traditionally, loans for big ticket items — like homes and cars — use the item being purchased as collateral. That way if the consumer stops making payments, the lender can seize that collateral to cover the unpaid debt.
An unsecured auto loan — or a personal loan used to purchase a car — has no collateral. Instead, just as with credit cards, if the borrower can’t pay, creditors can report the default to the credit bureaus and go to court to force collection since there is nothing to be repossessed.
How unsecured car loans work
An unsecured car loan is a personal loan that is used to purchase a new or used car. Since the loan is unsecured, if you stop making payments, the lender cannot repossess your car. The downside to an unsecured loan is that the interest rates and qualification standards are typically higher due to the lack of collateral.
Once you apply for and are approved for an unsecured car loan, the lender will usually send you the complete proceeds of the loan. You can then go to the car dealership or private vehicle seller as a cash buyer using the funds from your unsecured car loan.
Benefits of unsecured car loans
So why opt for an unsecured auto loan? Simplicity, says Kristin Shuff, LightStream’s vice president of marketing. “One of the easiest ways to make that simple for people with excellent credit was for someone not to have to do title and extra paperwork, so they can be a cash buyer,” she says.
Buyers can get the money in place even before they have decided exactly what kind of car they want to buy, Shuff says. If they change their minds at the eleventh hour and decide on a different car or a different dealer, they don’t need to have the bank cut another check.
“It really gives the client flexibility,” Shuff says. “If a consumer could get a better rate and less paperwork and more flexibility, that’s a win-win for them.”
While LightStream doesn’t need to know what kind of auto the borrower is purchasing ahead of time, it does reserve the right to request proof that the money was used to buy a car, she says.
Where to get larger unsecured loans
Many lenders make non-specific, five-figure unsecured loans to consumers who qualify. Check with a bank or credit union you currently do business with before moving on to compare other lenders.
For example, LightStream offers unsecured auto loans of up to $100,000 with rates from 3.99 percent to 20.49 percent as of June 2022. And PNC Bank makes unsecured loans of up to $35,000.
Typically, unsecured loans of this size should be reserved for cars that can’t be financed with a secured loan. These can include collectables and antiques.
Secured car loans are easier to get
In general, that collateral “allows the bank to offer a more favorable interest rate because it’s secured by the automobile,” says James Kendrick, vice president of accounting and capital policy for the Independent Community Bankers of America. “It allows more buying power,” he says.
For at least one lender, unsecured auto loans are part of its portfolio of offerings. SunTrust Bank started making unsecured auto loans through its online arm, LightStream, in March of 2013, says Kristin Shuff.
Credit score requirements vary with the borrower, their circumstances and the loan, but applicants should have credit scores above 680, Shuff says. “The score is not as important to us,” she says. “We look at income and assets.”
The bottom line
Using an unsecured personal loan to buy a car can be an attractive option for some borrowers. While unsecured loans generally have higher interest rates than loans that are secured by collateral, if you have a high credit score, you may be able to find a personal loan at a reasonable rate. Check auto loan rates to find the one that works for you.