When taking an unsecured loan, the banks rarely care about where the money is going. It could be for a new car, a boat, a vacation or for paying of previous debt. An unsecured loan means that there is no security tied to the loan, such as a car or other assets, that would otherwise be sold in order to pay back the loan if you are unable to.
In order to be eligible for a loan without security, you are usually required to be employed, have a clear credit history, and not have too many other loans. This type of loan is often popular due to the lack of a down payment, and the possibility to loan money for the whole value of the car. Also, unlike a loan with security, there are no requirements as to where the car has been purchased or how old it is. The downside is that you will most probably be offered a higher interest rate, than you would with security. An alternative is that you take a loan with security for 80 % of the car’s value, and pay the remaining 20 % through an unsecured loan. More information on the different types of loans can be found on the page Car Loans.
Keep in mind that the longer you have your unsecured loan, the larger will the total cost of the loan be. When taking a loan, some can offer you a type of insurance, which helps you cover your interest rate or amortization if you become incapable of paying it yourself as an effect of for example sickness or unemployment.
An alternative to unsecured loans is using your mortgage loan. Some increase their mortgage in order to finance a new vehicle, instead of acquiring a new loan. This could be the better alternative if you own your property, however it is essential that you have a good plan for how to repay the loan, especially if you choose a loan that doesn’t require you to amortize. This type of loan is often offered by banks, and means that you only pay the interest each month during a determined period, letting the debt remain.
Cars often drop considerably in value, especially new cars during their first years. If you finance your car through a mortgage loan which does not require you to amortize, you should make sure that you are able to pay the loan back at least in the same pace as the car loses value. If you pay just the interest rate, you will end up with a car that has lost much of its value, whereas the full amount of the loan remains to be payed back.
Please not that all of the above concerns the Swedish market, in terms of where the information has been gathered from and to where it applies.