Buying a used car with an unsecured loan may allow you to get financing without collateral, but it comes with eligibility challenges. Unsecured loans provide money based on the applicant’s income and credit profile alone, without the back-up of an asset such as a car or property.
Loan providers view unsecured loans as riskier, so they take extra precautions before approving a loan. Used car loan applicants with modest incomes or short credit histories often fail to qualify. However, those with strong financial credentials can get attractive interest rates with unsecured used auto financing. If you want to learn how to apply for unsecured used car loan and improve your chances of approval, read this article.
Factors to Consider When You Apply for Unsecured Used Car Loan
Follow the tips below, which cover key steps before you apply for unsecured used car loan. Understanding these details will better your chances of approval.
1. Check Your Credit Score
Your credit score plays a significant role in the approval process for unsecured loans. Scores usually above 750 increase the eligibility criteria for unsecured loan terms. If your score is lower, take time to improve it by paying all your bills on time, keeping credit balances low, correcting errors on your credit report, and not applying for too much new credit all at once.
2. Document Your Income
Loan providers want stable, verifiable income higher than the loan amount. Salaried applicants should have at least 2-3 years with their current employer. Self-employed applicants need 2+ years of business operation with income tax returns and bank statements reflecting healthy earnings. Highlight multiple income streams if applicable. The more reliable and steady your income documentation, the more favourable the loan terms and interest rates you are likely to receive.
3. Research Lender Requirements
Every financial institution has unique qualifying standards for unsecured used car loans. Thoroughly research options to find ones offering terms that align with your financial profile. Key factors that differ by loan providers include minimum credit score, income, employment history, maximum loan amount, interest rates, fees, and repayment terms.
4. Set a Budget
Realistically assess how much you can afford to borrow and repay every month for your used car purchase with an unsecured loan. Account for other financial obligations as well, so you don’t strain your existing budget. Calculate total loan costs based on factors such as vehicle price, loan amounts, interest rates, loan terms, processing fees and prepayment penalties from prospective lenders.
5. Prepare Documentation
Loan providers require some of the basic documentation supporting the details furnished in your loan application. Some of the typical documents include:
- Proof of Income: Recent pay slips, IT returns, bank statements
- Proof of Residence: Rent agreement, utility bills, voter ID/Aadhaar card
- Car Details: Invoice price, registration papers, insurance papers
Some financial institutions may approve unsecured used auto loans with a creditworthy co-signer who signs the loan agreement with the primary applicant. The co-signer must have excellent credit, higher income, and the willingness to take over loan payments if the primary applicant defaults. This option significantly improves eligibility, especially for first-time applicants.
7. Save up a Down Payment
Even a small down payment demonstrates your commitment and can increase your chances of approval, especially if you have a limited credit history or lower income. Come prepared with at least 10-20% of the used car value in savings, if possible. This gives lenders more confidence in your ability to repay an unsecured loan.
Conclusion
Follow this financial preparation while seeking an unsecured used car loan. Gather information to understand eligibility hurdles and take key steps to better position your application for approval. Leverage a co-signer when possible. Remain careful and persistent in your research and application process to get affordable unsecured financing terms from reliable lenders such as Shriram Finance that will allow you to purchase the right used vehicle.
