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Yahoo
5 days ago
- Automotive
- Yahoo
What you should know about unsecured auto loans
Unsecured auto loans are personal loans with no collateral, which you can use to buy a vehicle. You'll generally need good or excellent credit to qualify for an unsecured auto loan. Unsecured loans pose an elevated risk to the lender and often come with higher interest rates and shorter loan terms. If you default on the loan, the lender could report the delinquency and take legal action. Traditionally, loans for big-ticket items — like homes and cars — use the item being purchased as collateral. 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 to buy a car — requires no collateral. Instead, 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 repossess. An unsecured car loan is a personal loan used to purchase a new or used car. Since the loan is unsecured, the lender cannot repossess your vehicle if you stop paying. Instead, the lender can report the default to the credit bureaus and sue you. On the downside, the interest rates for an unsecured auto loan are typically higher than traditional auto loan rates. Eligibility requirements are also more stringent because of the additional risk the lender takes on. Qualifying for an unsecured loan generally requires: A solid credit score A borrowing history that shows a track record of consistent, on-time payments A reliable source of income Secured car loans require providing collateral to obtain approval. The lender keeps the car title until the loan is paid in full. Banks generally offer better interest rates and more flexibility on qualification for secured loans because the car acts as collateral, says James Kendrick, First Vice President of Accounting and Capital Policy for the Independent Community Bankers of America. The bank can more easily recoup its funds if the borrower defaults. 'It allows more buying power,' he says. Unsecured auto loans are quite attractive as they offer buyers simplicity and flexibility during the car-buying process. '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,' says Kristin Shuff, Divisional Chief Marketing Officer for LightStream, an online lender offering personal loans. She says buyers can get the money before deciding which car they want. If they change their minds at the eleventh hour and decide on a different car or dealer, they don't need the lender to cut another check. 'It really gives the client flexibility,' Shuff says. 'If a consumer could get a better rate, less paperwork and more flexibility, that's a win-win for them.' Though these loans offer convenience and less fear of repossession, they do have downsides compared to the traditional secured auto loan. These loans often come with higher interest rates since they are riskier for the lender. You may only qualify for a shorter loan term, which could make the monthly loan payments unaffordable. The lender could sue you to recoup the unpaid balance if you fall behind on loan payments. Many lenders offer five-figure unsecured loans to consumers who qualify. Typically, unsecured loans of this size should be reserved for cars you can't finance with a secured auto loan, including collectibles and antiques. Check with a bank or credit union you currently do business with before moving on to compare other lenders. Some other lenders to consider include: LightStream SoFi Best Egg 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.' Obtaining an unsecured car loan is similar to applying for a personal loan. Here are some steps you can generally expect when applying: Search online for lenders and visit their websites to learn about the application process. Check your current bank and local credit unions to learn whether they offer unsecured loans. Once you find a lender whose terms and interest rates work for you, submit your application and the required documentation. Documentation generally includes information about your employment history, income, residence, debts and savings. The lenders will pull your credit score as part of the application process. When you're approved, you'll sign the loan paperwork and then the lender will usually send you the complete proceeds of the loan. You can now go to the car dealership or private vehicle seller as a cash buyer using your unsecured car loan funds. Using an unsecured personal loan can provide buyers who have excellent credit with flexibility during the car buying process. If you change your mind about which car you want to buy, you won't need to revise your application with the lender. If you're considering an unsecured loan, research first to learn more about the interest rates and terms associated with this form of financing to ensure it is the best fit for your next auto purchase. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
22-05-2025
- Automotive
- Yahoo
How a car loan settlement affects your credit
If you can't repay your auto loan, your lender may be willing to accept a settlement for less than the full amount owed. Debt settlements have serious financial consequences, including higher income taxes for the year of the settlement and a hit to your credit score. There are several alternatives to consider before settling an auto loan, including loan modification and selling your car. It can be difficult to manage an auto loan with the hidden costs of car ownership on top of your other monthly expenses. A car loan settlement can potentially discharge your debt for less than the amount owed, but you need to understand how debt settlement works and the consequences. There are tax implications and alternatives of a car loan settlement you should consider before you jump in. A car loan settlement involves negotiating with the auto lender to pay less than the full amount due. If the lender agrees to a settlement, you make a lump sum payment for the agreed-upon amount by the agreed-upon date. For example, let's say a borrower owes $20,000 on their auto loan. However, with their current financial situation, they don't see any way they'll ever be able to repay this amount and all the interest that accumulates over time. The borrower contacts the lender, explains the situation and offers to pay $12,000 within 30 days if the lender forgives the remaining $8,000. The car loan is settled if the lender agrees and the borrower follows through with the car settlement payment. When you settle an auto loan for less than the total amount due, the creditor writes off the difference. The IRS treats this amount as taxable income, which means you have to pay taxes on it. You should receive a 1099-C cancellation of debt tax notice from your lender and file it with your annual tax return. The settled amount is treated as income and is taxed based on the standard income tax bracket for that year. If you struggle to make regular payments and can't manage your auto loan, settling your car loan allows you to put the debt behind you and start rebuilding your credit. Settling a car loan is better than failing to repay the loan and defaulting. Both will impact your credit score and may affect your future ability to borrow, but a default has more consequences for your credit score than debt settlement. Overall, settling your car loan could make sense if you are able to swing a large lump-sum payment. This is difficult for many people, so an alternative may be a better option if you aren't able to put thousands toward paying off a car loan. The car loan settlement process may cause your credit score to go down because it is a negative mark on your credit report. Your credit score is used in future loan applications, rental applications and, in rare cases, employment applications. The lower your score, the less likely you are to qualify for those things. Even if you are approved for a loan, the lender might require a higher interest rate. Similarly, a rental application may still be approved — but with an increased security deposit. Settling an auto loan affects your FICO score in other ways, too. Your FICO score considers many factors, including length of credit history and credit mix: Your length of history is the average amount of time your credit lines have been active. When a debt, like an auto loan, is settled, the line is closed, which reduces your overall average. Credit mix refers to the types of debts you carry. Installment loans like home loans, auto loans and student loans are viewed favorably, while consumer debts, like credit cards, are viewed negatively. The severity of the credit score drop varies based on a number of factors. Generally, the higher your score is before the loan settlement, the more it will go down after the settlement. A settled account will remain on your credit report as a derogatory mark for seven years after the original delinquency date. The best option for your credit is always to pay off your debt in full, but that's not always possible. If you can't do that, try to work with your lender to find the best solution. You may also want to seek credit counseling for advice on what would be best for your situation. Pay off the loan as planned If there is any way to continue making payments as scheduled, that is the best option for protecting your credit. You could cut non-essential expenses or generate more income with a side hustle. Modify your car loan Depending on your situation, you may be able to modify your car loan by negotiating the terms of your loan with your lender. For example, you might ask if they will accept a lower interest rate or extend the loan term to lower your monthly payments. Just know that extending the loan term typically means paying more in total interest. Refinance your car loan Similarly, you can look into refinancing your car loan. This allows you to borrow from a different lender, sometimes at lower rates or with a longer term. Both are intended to get you lower monthly payments. Trade in or sell your car If your car loan is too expensive, consider trading in your car at a dealership or selling it privately. You can then buy a less expensive vehicle that better fits your budget. Consolidate your debts Debt consolidation means taking out one new loan to repay all your existing loans. Depending on the terms of your debt consolidation loan, your monthly payment may be lower than the total of your current bills — but you might pay more interest over the loan term. Allow your car to be repossessed Vehicle repossession negatively impacts your credit, but it is still an option. You can ask to have your car voluntarily repossessed to avoid a lengthy and expensive process. File for bankruptcy If your car payment isn't your only financial issue, you may want to speak to a lawyer about filing for bankruptcy. This is a last resort and a lengthy process, but it can bring substantial relief to your Settling your car loan is different from vehicle repossession. With an auto loan settlement, you agree with the lender to pay a portion of your original debt. Your debt is then settled. With repossession, the lender takes possession of the vehicle and sells it to pay off some or all of your debt. If the car sells for less than the amount you owe, you owe the lender the difference. This is called a deficiency payment. Debt settlement and repossession both impact your credit score negatively. Since late payments often precede either option, you may have multiple negative marks in your credit history regardless of if you settle your debt or have your vehicle repossessed. After you settle an auto loan, you can focus on rebuilding your credit. Continue to pay other bills. Each on-time payment demonstrates responsible credit usage and boosts your score. Plus, as you pay down debts, your credit utilization ratio improves, which further helps your FICO score. Avoid new lines of credit. New lines of credit temporarily decrease your credit score because they reduce the average age of your credit lines. Keep your accounts open. Keep your credit card accounts open while you pay them off to avoid reducing the length of your credit history and increasing your credit utilization ratio. Before pursuing a car loan settlement, understand the immediate and long-term effects this decision might have on your finances. The long-term damage does not always outweigh the short-term benefits of settling a car loan. Keep in mind that while one car settlement payment can end an overwhelming debt, it also brings a lower credit score, higher income taxes and future challenges when applying for loans. When in doubt, seek advice from a reputable credit counseling service to make sure your decision aligns with your long-term financial plans.
