An unsecured car loan is when a credit provider lends you an amount of money that is not secured by the value of an asset. As there is no collateral, if you default on your loan repayments, your lender cannot repossess the vehicle you have purchased with the loan.
Most car loans are secured, as this reduces the financial risk on the lender. If you default on your repayments, the lender can repossess the asset used as security. The asset used as security is typically the vehicle purchased.
Types of Unsecured Car Loans
Fixed Rate: As the name suggests, unsecured car loans with fixed rates charge the same interest rate during the entire loan term. That means that borrowers agree to pay a set amount of interest as part of their regular loan repayments, so repayments never change. This certainty can be appealing, but it could also mean borrowers miss out on rate cuts, because the rate stays the same regardless of whether the lender’s interest rate drop.
Variable Rate: Unsecured loans with variable interest rates means the interest rate on the loan may change during the loan’s term, so your repayments can change too. You can save money if there’s a rate cut, as your repayments will fall. However, if your lender raises the rate, your repayments would increase, and potentially leave you out of pocket if you have a strict budget.
Which is best, fixed or variable?
The best decision for you will depend entirely upon your financial situation.
If you have a strict budget, and you need to know exactly what your repayments will be, a fixed loan may be best. However, you need to be aware of the potential savings you could miss out on if interest rates fall.
If you opt for a variable rate loan, you will get the benefit of rate cuts. However, your loan repayments would rise with any rises in official interest rates. Given that scenario, it might be wise to work on the assumption that your interest rate will eventually rise by up to 3 percentage points, and budget accordingly. This means if your lender does increase the rate on your loan, you will still be able to make your repayments.