Secured vs. Unsecured Car Loans

If you are looking for a way to finance your next car purchase, you may have come across the terms "secured car loan" and "unsecured car loan". But what do they mean and how do they differ from each other? In this article, we will explain what a secured car loan and an unsecured car loan are, how they work, and what are the benefits and drawbacks of choosing each option.

What is a secured car loan?

A secured car loan is a type of personal loan that uses the car you are buying as collateral for the loan. This means that if you fail to repay the loan, the lender can repossess and sell your car to recover their money. A secured car loan is usually offered by banks, credit unions, and other financial institutions.

How does a secured car loan work?

To get a secured car loan, you need to meet some eligibility criteria, such as having a steady income, a good credit history, and proof of residency. You also need to find a car that meets the lender's requirements, such as being new or used, having a certain value, and being registered in your name.

Once you have found a suitable car and a lender, you can apply for the loan online or in person. You will need to provide some personal and financial details, such as your income, expenses, assets, liabilities, and the details of the car you want to buy. The lender will then assess your application and perform a credit check to determine your interest rate and loan terms.

If your application is approved, you will receive a loan contract that outlines the amount you can borrow, the interest rate, the fees and charges, the repayment schedule, and the security agreement. You will need to sign the contract and return it to the lender, along with any other documents they require.

The lender will then transfer the funds the seller of the car. You will then become the owner of the car, but the lender will have a legal right over it until you pay off the loan in full.

What is an unsecured car loan?

An unsecured car loan is a type of personal loan that does not use the car you are buying as collateral for the loan. This means that if you stop making payments on the loan, the lender cannot repossess your car. However, they can report your default to the credit bureaus and sue you for the outstanding amount. An unsecured car loan is usually offered by online lenders, peer-to-peer lenders, or brokers.

How does an unsecured car loan work?

To get an unsecured car loan, you need to have a strong credit history and score, as this is the main factor that determines your eligibility and interest rate. You also need to have a stable income and low debt-to-income ratio. You can use an unsecured car loan to buy any type of vehicle that suits your needs.

Once you have found a suitable vehicle and a lender, you can apply for the loan online or over the phone. You will need to provide some personal and financial information, such as your name, address, income, expenses, assets, liabilities, and credit score. The lender will then review your application and perform a credit check to decide whether to approve your loan and at what interest rate.

If your application is approved, you will receive a loan contract that specifies the amount you can borrow, the interest rate, the fees and charges, and the repayment schedule. You will need to sign the contract and return it to the lender electronically.

The lender will then deposit the funds into your bank account or send them directly to the seller of the vehicle. You will then become the owner of the vehicle, but you will still owe money to the lender until you pay off the loan in full.

What are the benefits of a secured car loan?

A secured car loan has some advantages over an unsecured car loan, such as:

• Lower interest rate: Because the lender has less risk of losing money if you default on the loan, they can offer you a lower interest rate than an unsecured car loan. This can save you money on interest over the life of the loan.
• Higher borrowing amount: Because the lender has more security over your loan, they can let you borrow more money than an unsecured car loan. This can help you buy a more expensive or newer vehicle.
• Longer repayment term: Because the lender has more confidence in your ability to repay the loan, they can offer you a longer repayment term than an unsecured car loan. This can lower your monthly repayments and make them more affordable.
• Easier approval: Because the lender has less stringent criteria for approving your loan, they may be more willing to lend you money even if you have a bad credit history or a low income.

What are the drawbacks of a secured car loan?

A secured car loan also has some disadvantages that you should be aware of before applying for one, such as:

• Risk of losing your car: The biggest drawback of a secured car loan is that if you miss your repayments or default on the loan, the lender can repossess and sell your car to recover their money. This can leave you without a vehicle and still owing money to the lender.
• Higher fees and charges: Because a secured car loan involves more paperwork and legal processes than an unsecured car loan, it may come with higher fees and charges, such as application fees, origination fees, registration fees, early repayment fees, and late payment fees.
• Limited choice of cars: Because the lender has certain requirements for the type and value of the car you can buy with a secured car loan, you may have limited options when shopping for a vehicle. For example, some lenders may only accept new cars or cars under a certain age or mileage as collateral.

What are the benefits of an unsecured car loan?

An unsecured car loan has some advantages over a secured car loan, such as:

• No risk of losing your car: The main benefit of an unsecured car loan is that if you stop making payments on the loan, the lender cannot repossess your car. However, this does not mean that you can default on the loan without consequences, as the lender can still damage your credit score and take legal action against you.
• Lower fees and charges: Because an unsecured car loan does not involve any collateral or security, it may have lower fees and charges than a secured car loan. For example, you may not have to pay any registration fees, valuation fees, or early repayment fees.
• More choice of cars: Because an unsecured car loan does not have any restrictions on the type and value of the car you can buy with it, you may have more options when shopping for a vehicle. For example, you can buy any new or used car that suits your needs and preferences.

What are the drawbacks of an unsecured car loan?

An unsecured car loan also has some disadvantages that you should be aware of before applying for one, such as:

• Higher interest rate: Because the lender has more risk of losing money if you default on the loan, they may charge you a higher interest rate than a secured car loan. This can cost you more money on interest over the life of the loan.
• Lower borrowing amount: Because the lender has less security over your loan, they may limit the amount of money you can borrow with an unsecured car loan. This may prevent you from buying a more expensive or newer vehicle.
• Shorter repayment term: Because the lender has less certainty about your ability to repay the loan, they may offer you a shorter repayment term than a secured car loan. This can increase your monthly repayments and make them less affordable.
• Harder approval: Because the lender relies mainly on your credit history and score to approve your loan, they may be more reluctant to lend you money if you have a bad credit history or a low income.

How to compare secured and unsecured car loans?

If you are undecided between a secured and an unsecured car loan, you should compare different lenders and their offers before applying for one. Here are some factors to consider when comparing secured and unsecured car loans:

• Interest rate: The interest rate is the percentage of the loan amount that you pay in interest each year. It affects how much your monthly repayments are and how much interest you pay over the life of the loan. Look for a low interest rate that suits your budget and financial goals.
• Fees and charges: The fees and charges are the extra costs that you pay on top of the interest rate. They affect how much your total loan cost is and how much money you need to borrow. Look for a loan with low or no fees and charges that are transparent and reasonable.
• Loan amount: The loan amount is the total amount of money that you can borrow with the loan. It affects how much vehicle you can buy and how much debt you have. Look for a loan that offers enough money to buy the vehicle you want, but not more than you need or can afford to repay.
• Loan term: The loan term is the length of time that you have to repay the loan. It affects how much your monthly repayments are and how long you are in debt. Look for a loan that offers a flexible repayment term that matches your income and financial situation.
• Repayment options: The repayment options are the ways that you can pay back the loan, such as weekly, fortnightly, or monthly payments, direct debit, or online banking. They affect how convenient and easy it is to manage your loan. Look for a loan that offers repayment options that suit your preferences and lifestyle.
• Customer service: The customer service is the quality and availability of the lender's support and assistance. It affects how well you are treated and how quickly and effectively your issues and queries are resolved. Look for a lender that has a good reputation, friendly staff, and multiple contact channels.

Why choose Ausloans for your car loan?

If you are looking for a car loan that suits your needs and situation, you should consider Ausloans. We are a leading financial brokerage that can help you find the best car loan from over 40 lenders across Australia. Whether you need a secured or an unsecured car loan, Ausloans can compare hundreds of products and find the one that matches your budget and preferences.

Here are some reasons to choose Ausloans for your car loan:

• Fast and easy application: You can apply for a car loan online or over the phone in minutes. You will get a response within 24 hours and receive the funds within 48 hours.
• Competitive rates and fees: Ausloans can negotiate with lenders on your behalf and get you the lowest interest rates and fees possible. You can save money on interest and charges over the life of the loan.
• Flexible terms and options: Ausloans can tailor your car loan to suit your needs and situation. You can choose the loan amount, term, repayment frequency, and vehicle type that works for you.
• Expert advice and support: Ausloans has a team of experienced and qualified brokers who can guide you through the car loan process and answer any questions you may have. You can contact them by phone, email, or chat anytime.

Conclusion

A secured car loan and an unsecured car loan are two types of personal loans that you can use to buy a new or used vehicle. They have different features, benefits, and drawbacks that you should consider before applying for one. You should compare different lenders and their offers to find the best deal for your needs and situation.

If you need help finding the best car loan for you, contact Ausloans today. Whether you need a secured or an unsecured car loan, we can find the one that suits your budget and preferences, with the best terms and conditions for your circumstances. Our team of brokers are highly experienced and fully committed to finding you the best loan.

Resources: 
Secure Loans vs Unsecured Loans
Unsecured vs Secured Loans: Definitions and Differences
Secure Debt vs. Unsecured Debt: What's the difference?
Secured vs. unsecured loans