There are a number of differences between a secured and unsecured auto loan. If the loan is unsecured that means there is no collateral. The automobile is not being used to obtain the loan. Whenever you have a secured auto loan there is collateral pledged as security for the loan, usually this is the car you have purchased. If a loan goes into default a lender will look at different methods of collections for both types of loans. The terms and agreements can also vary for secured and unsecured loans.
A secured loan transaction will spell out specifically the type of car being used for collateral. The promissory note will list the make, year, vehicle identification number and color of the car. The note will also explain all of the actions a lender can implement if the car loan is not paid on time. If actions are taken it will also explain all of the fees the lender will assess to your account in the event of a default.
When you have a secured auto loan the lender can repossess the car if you fall behind on your payments. Once the repossession has taken place, the lender will sell the automobile at an auction to the highest bidder. If a deficiency balance remains you may be responsible for it, depending on which state you live in. The lender may pursue collection activities in cases where a balance is owed.
A car repossession can be very damaging to your credit file. This information remains on your credit report for seven years. It will be difficult to get approved for other credit products in the future. Any creditor that decides to approve you for credit will charge the highest rate of interest and there could be some fees involved. The longer a repossession remains on your credit file the less damaging it will be to your credit.
You can purchase an automobile using a credit card if your credit limit is large enough. Another way to purchase a loan is with a signature or personal loan. When you purchase an auto with a signature loan you will probably be able to purchase a used car but not a new car because of the amount involved. A personal loan is approved based on your own credit worthiness. Both loans are unsecured.
When an unsecured loan goes into default there is no automobile to repossess because it was not pledged as security. The lender may have to start legal action and obtain a judgment. Once a judgment is acquired the lender has several options at their disposal. They could get a bank levy, which freezes all of the money in a checking account or a portion of it. The bank is then required to release the frozen funds to the lender as payment for the loan. The lender may also seek a wage garnishment, which takes a portion of the debtor's pay check every pay period. Usually the amount is 25 percent of the disposal income.
