An unsecured car loan is a kind of personal loan that is offered solely for the acquisition of a vehicle. The loan will normally come with additional benefits including discounted car parts, breakdown cover, vehicle inspections, etc.
Unsecured personal loans – and therefore car loans – are customarily covered by the terms of the Consumer Credit Act
An unsecured car loan works similarly as a traditional personal loan: a lump sum is granted in return for you agreeing to perform regular repayments, usually via Direct Debit. It is repayable over a specified period of time, normally between six months and ten years (even though loans for car finance tend to be over a shorter term, usually three years). Security will normally be required for loans of a large amount.
Lenders charge interest on the amount availed. The interest rate is normally fixed at the inception of the loan, which signifies that the repayments remain the same throughout the term.
The interest charge is recorded as an APR (Annual Percentage Rate). Any institution that lends money is obliged by law to quote the APR and to suggest this advertised rate to 51 percent of borrowers. The APR is usually dependent on the amount of the loan and sometimes the term as well, even though some lenders do offer the same rate to all their borrowers.
It is important to check for the best rate that is dependent on the amount of loan and term that you are after.
Read our guides on personal loans for more in-depth summaries of the things that you need to think about when taking out an unsecured car loan, including:
- Representative APR – The advertised representative APR may not always be the one that you receive, the rate that you are given depends on your credit rating, a scoring system that is used by most lenders to determine how creditworthy an applicant is.
- Personal loan early settlement penalties – Paying for your loan earlier than when it will fall due can save you a lot of money in interest. However, some lenders charge penalties to customers that are wishing to repay the entire amount before the end of the term. If you are refinancing, you should take into consideration the said penalty.
- Personal loan deferment periods and payment breaks – A break between when you receive your loan proceeds and when the first payment falls due, beyond the standard month, is allowed by many lenders. While this gives you a break from your dues, interest is charged over this period which actually raises the total interest payable. Payment breaks during the loan term also alo be offered by the lender, however, interest is charged on the amount that is not paid. This indicates that a larger loan amount is left unpaid for a longer period. These breaks may incur charges.
- Direct Debits – To pay the monthly instalments, most lenders require a Direct Debit. Verify if your bank account can accommodate these and make sure that the money is available for payments. Penalty charges for missed payments can be huge.
- Payment protection insurance for unsecured loans – This is an insurance that is optional. It will cover your repayments should you not be able to work under particular circumstances and can include:
It is important to read the small print to make sure that the cover that is provided is suitable for your needs.