October 20, 2018

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’ when looking at the different options. Learn about the differences between the two and how they can make a difference to how much you pay.  

Secured car loans

A secured loan is one where an asset (usually the one you’re buying with the loan) 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).

Unsecured car loans 

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.

Interest rate comparison

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

A quick scan of the market at the time of writing (18/09/18) shows that the lowest secured car loan interest rate is 4.74% (5.29% comparison rate). Comparatively, the lowest unsecured car loan rate is 5.99% (6.20% comparison rate).

At the other end of the scale, the highest rate on a secured car loan sits at around 15.99% (16.29% comparison rate), and the highest unsecured rate is 17.99% (17.99% comparison rate). 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 Savings.com.au’s car loan repayment calculator for a five-year loan.

Secured loan Unsecured loan
Loan amount $25,000 $25,000
Lowest Interest rate 4.74% 5.99%
Monthly repayments $469 $483
Total loan payable $28,129 $28,992

Source: Savings.com.au Car Loan Repayment Calculator. Ongoing & upfront fees excluded. 

So a secured $25,000 car loan over five years could cost you around $800 less in interest costs compared to an unsecured car loan, assuming the lowest current interest rates are paid 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 should you use: 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.

About the author  ⁄ William Jolly

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