Secured vs unsecured car loans

Learn about the differences between the two and how they can make a difference to how much you pay.

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Monthly repayments:$583

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What is a secured loan?

A secured car loan is one where an asset (the car you’re buying) is used as collateral against the loan. This means that in the event that you fail to meet your repayments, the lender has the right to send in the repo men to take the asset off you to recuperate its funds.

Secured loans are the more common type of loan. A secured car loan is essentially the same as a home loan, with the car you’re buying used as security. With a home loan, the house bought is the security on the loan. If you don’t meet the repayments, the lender has the right to take the house from you and sell it.

What else can you use as car loan security?

You don’t have to actually use the car as security, although this is the more common option. Other assets you can use include:

• Term deposits
• Property (can be risky – would you be willing to lose your home over a car loan debt?)
• Other high-cost items like jewellery (this can be a bit muddled so you’ll need to speak to your lender about what they’ll accept).

What is an unsecured loan?

As you might’ve gathered from the ‘un’ in the name, unsecured car loans do not require you to use your car as security. They don’t require you to use anything as a security, which understandably represents a much higher risk for them. If you were to be struggling financially or go off the grid, the lender will have to take you to court in order to get their money back. For this reason, they're essentially the same thing as a personal loan. 

To compensate for this risk, lenders offering unsecured car loans will usually charge a higher interest rate, more fees and probably won’t be as lenient with who they lend to. So if you’ve fallen behind on the old credit rating lately, you might struggle to get approved for an unsecured loan.

Benefits of an unsecured car loan include the fact that you can use them for cheaper, used cars, and that you can often borrow more than the car’s value to pay for things like registration, insurance and a nice pair of sub-woofers. An unsecured car loan might also be useful if you’re purchasing a car as a gift for somebody and you don’t want them to lose their car if you can’t meet the repayments.

Secured vs unsecured car loan interest rates

As we said above, unsecured car loans often carry higher interest rates, compared to secured car loans. More risk means more interest they’ll charge to cover the possibility of the loan going kaput.

As of 2021, the average interest rate for a secured car loan is about 7% p.a, while for unsecured loans the average rate is just over 10.50% p.a. The lowest interest rate Savings.com.au could find for secured car loans is 3.97% p.a, and the highest is 17.99%. 

For unsecured loans, the minimum and maximum available is around 4.99% p.a and 20.25% p.a. These rates can vary based on your credit rating, but this should give you an idea of what’s available.

Secured vs unsecured car loan fees

• Secured car loans charge $232 on average compared to $179 for unsecured loans, but
• $0 application fees are more common in secured car loans, and
• The maximum application fee for unsecured loans is higher ($995) than it is for secured loans $599

Ongoing fees among secured and unsecured car loans are very similar, both averaging around $30 annually. 

How much can you save with a secured car loan? 

Let’s have a look at how much of a difference this can make, using our car loan repayment calculator for a five-year loan.

Ongoing & upfront fees excluded. 

So a secured $25,000 car loan over five years could cost you around $1,000 less in interest costs compared to an unsecured car loan, assuming you’re paying a pretty low interest rate on each.

Take this with a grain of salt though – it doesn’t factor in several things like the fees on your car loan, what your balloon payment is, any possible introductory rates and whether or not your rate changes if you take out a variable loan.

Secured, or unsecured, which is better?

There are a lot of factors you’ll need to weigh up when it comes to deciding on a car loan option:

• What kind of car do you want?
• How much are you willing to pay? How much are you able to pay?
• How long do you want your loan to be? And…
• Can you afford to lose the car if you don’t meet the repayments?

It’s this last point that you need to give a bit of thought to. If you really need a vehicle and won’t be able to function without it, then an unsecured car loan would allow you retain possession of the vehicle, at the cost of potentially facing legal action from your lender.

This obviously wouldn’t be ideal, and would also harm your credit rating, making it more difficult to get approved for other loan and credit products in the future. If you’re struggling to meet your repayments, try speaking to your lender first about a potential financial hardship variation, which could see your loan period extended or your repayments frozen for a while.

Secured loans, on the other hand, are a safer option for the lender, and they’ll be safe for you too if you’re a reliable borrower with a solid credit rating. As long as you make your repayments on time, then you won’t have to worry about losing the car while also securing a potentially lower interest rate and more flexible terms to boot.

Savings.com.au’s two cents

In most cases, a secured car loan can save you money in interest, but just remember: the example above is for a like-for-like car loan with different interest rates only. You’ll often find that secured car loans are used on cars that are newer and more expensive, while unsecured loans are more commonly used for older, possibly used cars that are worth less.

While you might end up paying more, you might not, and depending on the car you buy and what it’s worth, it might only be a few hundred more at most. This can be a small price to pay for a loan that you can end up paying off sooner.

Photo by Binara Weerasinghe on Unsplash. Originally published by William Jolly. Updated by Alex Brewster 7/1/2021.