What's The Difference Between Secured and Unsecured Car Loans?
When you get a car loan, you'll need to decide whether to take out a secured car loan or if an unsecured loan is going to be a better option.
To make the right choice, you'll need to understand the difference between secured and unsecured car loans.
Secured car loans
Unsecured car loans
|Buy a car less than 7 years old
|Buy a car of any age
|Lender registers interest in car on PPSR
|No security required for the loan
|Usually lower interest rates
|Can have higher interest rates
|Car repossessed if you default
|Car will not be repossessed if you default
|Need lender permission to sell the car
|Sell the car unencumbered
|All loan money must be used for car purchase
|Loan can be partly used for other purposes
Secured vs unsecured car loans
To understand why an unsecured car loan is more expensive than a secured car loan, you need to understand how providing 'security' works to reduce the risk for a lender, giving you access to a lower interest rate.
An unsecured car loan will have a higher interest rate because the lender doesn't have an avenue to recover the loan money if you don't pay it back.
What does it mean to 'secure' a loan?
When you 'secure' a loan, it means that you provide some collateral for the loan, giving the lender an option to recover the loan money if you are unable to repay it.
Mortgages are the most common secured loans
The biggest secured loan you'll ever take out is a mortgage. This is where the bank registers an interest or 'mortgage' over the house that you buy. When you first buy the house, you'll usually provide a deposit of 10 or 20 per cent of the value of the home and borrow the rest from the bank.
As you make your mortgage payments, you will gradually own more of the house. If you find that you can't meet the mortgage payments, the bank might exercise the security over the house and sell it to recover the money you borrowed to purchase the house.
A secured car loan works like a mortgage
It's exactly the same for a secured car loan, though you are borrowing a much smaller amount of money. The lender will register their interest in your car on the Personal Property Security Register until the loan is repaid in full.
If you cannot repay the loan amount, the lender may exercise their right to sell the car to recover the money lent to you for the purchase.
What's the advantage of an unsecured car loan?
The primary advantage to getting an unsecured car loan is that it gives you a lot more flexibility.
- You don't have to use all the money you borrow to buy the car - you can use some of it for other purposes.
- The car itself is unencumbered - you won't risk losing it if you can't meet the repayments.
- You can buy a car that's more than 7 years old. This means you can spend less on your car, and still get a great, reliable runabout.
Why is a secured car loan good?
A secured car loan is cost-effective when you're buying a newer car, and looking to get a better interest rate on it.
These are the most common types of car loans, but a secured car loan isn't always the optimal choice to buy your car.
Which type of car loan should I choose?
You'll need to weigh up the benefits of each option to work out which car loan aligns with your goals.
The car loan that you choose will really depend on the car that you want to buy.
Buying a newer car, you can take out a secured car loan with a lower rate, but your initial purchase price and total loan amount will be much larger.
With an unsecured car loan, you can buy a less expensive car, usually an older car, and borrow a smaller amount.
An unsecured car loan could work out better for you financially in the long run, as you'll pay back the loan much quicker than if you'd borrowed a larger amount over a longer term.
You can compare your own secured and unsecured car loan options by speaking to the staff at Positive Lending Solutions, to help you to make the best decision for your next car loan.