A secured car loan is a type of car loan in which the car you intend to finance is used as a guarantee, or in finance terms as a “security”, against the loan. This reduces the chance of the lender incurring losses. Due to the decreased risk on the lender’s part, a lender will offer borrowers lower interest rates compared with an unsecured loan of comparable terms.
What are the main differences between secured and unsecured car loans?
The main difference between secured and unsecured car loans is that in a secured car loan, as a condition of the loan, the car you buy is tied to the value of the loan as a security or collateral. This means if a borrower falls behind on their payments and defaults, the bank or lender can repossess the car to cover their losses. Because they have that right, they are “insured” against losses to a certain extent and pass on lower interest rates.
Despite the scary talk about defaults, they are still quite rare. According to the Fitch ‘Dinkum’ Automotive Asset Backed Securities index, during the June quarter of 2017, the rate for defaults Australia-wide was 0.44%.
How do I compare different secured car loans?
A good way to compare different loans is to work out your repayments. You can get an estimate of your repayments each month, fortnight, or week using a car loan calculator. You’ll need three numbers: the interest rate of the loan; the amount you wish to borrow; and your loan term. This way you can see a round-about number of how much you’ll pay each week.
Remember to do a like-for-like comparison. Some car loans are marketed with base interest rates which do not include most fees such as account keeping fees or ongoing fees. You’ll need to find what’s known as a comparison rate that includes these fees expressed as a percentage. This can give you a clearer understanding of how much you can expect to repay each period. To save time on looking for loans, you may consider talking to a car loan broker, which can compare loans on your behalf from their lending panel.
I have bad credit. Can I get a secured car loan?
Yes. Due to the higher risk profile of bad credit or impaired credit customers, many lenders will only approve you for these types of loans. Despite the nature of the loan being secured, bad credit customers must be prepared to accept a higher than usual interest rate due to their low creditworthiness.
What are the advantages to secured car loans? What should I know?
There are many advantages to taking out a secured car loan instead of an unsecured personal loan when buying a car. The first and most obvious advantage is cost. These loans will usually (though not in all circumstances) have lower interest and/or comparison rates than an unsecured loan. Since your car is tied to the value of the loan, there is lower risk on the part of the lender. The savings are passed on to the borrower in this case.
Another advantage is choice and flexibility. For example, you might be given a choice of fixed or variable rate loans. Variable rate loans are loans where the interest rate can go up or down depending on the market. Fixed rate loans are set at one interest rates from start to finish. Variable loans are more flexible in terms of making extra repayments; fixed rate loans may not allow extra repayments without penalty but are consistent in terms of repayments, which makes budgeting easier. Variable rate car loans do exist but are few compared to fixed rate car loans.
Some of these loans may also include redraw facilities, where you can take out money stored up in equity. Take note that these types of loans are quite rare. It can also increase the amount you pay in interest, as it increases your loan term and/or repayments each month.
Some lenders may allow you to buy used vehicles with a secured car loan. In some instances, a buyer can get a car over ten years old. Other lenders may approve secured finance for rare or vintage cars at auction.
What pitfalls should I avoid when taking out a secured car loan?
One common pitfall you can avoid is not budgeting to include other expenses associated with a car purchase. These are ongoing costs such as fuel, insurance, registration, and maintenance.
Another mistake you can avoid is not choosing a loan that is flexible to changing circumstances. If you are starting your career and know your income will increase over time, choosing a seven-year loan with limited early payment options may cause you to pay more in interest. Likewise, you may want a balloon payment that reduces your monthly or regular repayment. However, this sets aside a portion of the loan (20-50%) for immediate payment at the end of the term. There are different options to pay the balloon: paying the lump sum, extending the loan term to pay off the balloon, or refinancing the balloon payment with an external personal loan. The latter two options will mean paying more in interest, however.
You should also read any terms and conditions o r fee schedules from your lender, so you are not caught out by repayments. If your lender can offer you a comparison rate that includes most recurring fees (except for transactional fees, such as requesting a statement) you can use this in your overall calculations.