Secured vs unsecured car loans

William Jolly By on October 9, 2019
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Secured vs Unsecured Car Loans

If you’ve been searching for a car loan, then you’ve probably stumbled across the terms ‘secured’ and ‘unsecured’.

What’s in this guide:

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

Low car loan rates

If you’re looking for a low-rate car loan, the following table displays a mix of secured and unsecured car loans from a variety of lenders, sorted by the interest rate.

These loans are available for new cars only.

Company Advertised rate Comparison rate* Monthly repayments  
Car Loan (New) 4.89% 5.44% $370 More details
Car Loan (Up to 2 years old) 5.49% 5.84% $382 More details
New Car Loan 5.49% 5.87% $382 More details
Discounted Personal Loan (Car Loan) 5.64% 5.99% $383 More details
New Car Loan Fixed 6.45% 6.66% $391 More details
Secured Car Loan Fixed 8.49% (up to 10.99%) 9.54% (up to 12.02%) $410 (up to $435) More details
Ad rate Comp rate* Repayments
Car Loan (New)
4.89% 5.44% $370
More details
Car Loan (Up to 2 years old)
5.49% 5.84% $382
More details
New Car Loan
5.49% 5.87% $382
More details
Discounted Personal Loan (Car Loan)
5.64% 5.99% $383
More details
New Car Loan Fixed
6.45% 6.66% $391
More details
Secured Car Loan
8.49% (up to 10.99%) 9.54% (up to 12.02%) $410 (up to $435)
More details

*Data accurate as at 3 October 2019. Rates based on a loan of $20,000 for a five-year loan term. Products sorted by advertised rate, then by company name (A-Z). View disclaimer.

What is a secured car 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 home loan is probably the largest secured loan you’ll ever take out, where the house it’s bought with 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 to recoup its money. A car loan is essentially the same, with the car you’re buying used as security.

What else can you use as a 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 car 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.

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.

Do secured and unsecured loans have different 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.

A quick scan of the market shows that a typical low secured car loan interest rate is around 5% p.a, while a low rate for an unsecured loan might be a bit higher in the 6.50% p.a. range.

At the other end of the scale, higher secured and unsecured interest rates can be higher than 15% p.a, with the highest we found at 17.5% p.a. These rates can vary based on your credit rating, but this should give you an idea of what’s available.

How much can you save? 

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.

Secured loanUnsecured loan
Loan amount$25,000$25,000
Interest rate5% p.a.6.50% p.a.
Monthly repayments$471.78$489.15
Total loan payable$28,306.85$29,349.22

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).

So which is better: Secured, or unsecured?

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, and can secure a 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.

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in 2018. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate includes both the interest rate and the fees and charges relating to a loan, combined into a single percentage figure. The interest rate per annum is based on a loan credit of $150,000 and a loan term of 25 years.

William Jolly
William Jolly joined Savings.com.au as a Financial Journalist in 2018, after spending two years at financial research firm Canstar. In William's articles, you're likely to find complex financial topics and products broken down into everyday language. He is deeply passionate about improving the financial literacy of Australians and providing them with resources on how to save money in their everyday lives.
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