Borrowers using an unsecured motor vehicle loan are not required to nominate the purchased vehicle as security.

When you borrow money for a motor vehicle purchase with an unsecured loan, lenders will not require the purchased vehicle as collateral, which denotes a lower risk for borrowers but at the price of slightly higher interest rates.

The lack of required security for an unsecured loan means that borrowers will not face repossession in the event they are unable to continue repayments due to a shift in their financial situation. Application for an unsecured loan is much simpler and quicker — along with the inclusion of flexible repayment terms, they are suitable for borrowers who require a smaller amount of funds for a vehicle purchase. 

However, the same lack of collateral presents higher risks for lenders, who in turn offer higher interest rates. Even small differences in the interest rate can lead to big changes to the cost of repayment — which is why unsecured motor vehicle loans are typically used to purchase a second-hand car rather than a new one.

Are there any risks for defaulting on an unsecured motor vehicle loan?

Yes — even with your personal assets out of the picture, being unable to repay your unsecured motor vehicle loan will result in negative consequences. While lenders will be unable to claim ownership of the purchased vehicle (or any of your other assets), defaulting on the loan will still have a negative impact on your credit score and borrowing history. Having a low credit score will make it significantly more difficult to borrow additional funds with a loan in future.

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