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Secured vs Unsecured Car Loans

Find out about the differences between secured and unsecured car loans as well as other ways you could finance your next car with Savvy.
Published on September 30th, 2022
  Written by 
Adrian Edlington
Adrian Edlington is PR & Communications Manager at Savvy. With a keen interest in personal finance, car loans, the mortgage industry, cost of living pressures, electric vehicles and renewable technology, Adrian's research includes conducting primary data surveys and analysis of up-to-the-minute secondary Australian data sources. His work on behalf of Savvy has been featured on ABC.net.au The Conversation, the Sydney Morning Herald, AFR, News.com.au, The Age, Herald Sun, Adelaide Now, SBS On The Money, 7News, Car Expert, Which Car, Drive.com.au and more. In his spare time, Adrian enjoys mountain biking and business podcasts.
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Bill Tsouvalas

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Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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There are many ways to go about financing your vehicle purchase if you aren’t paying cash up front. Secured and unsecured car loans are two of the most common ways to do this, but it’s important to appreciate how these types of finance differ from one another before diving into your application. In this guide, we’ll cover the key information then look at other types of finance you could get so you can weigh up your options before buying your next car.

What are secured car loans and how do they work?

Secured car loans are the most common type of finance taken out to help people purchase their vehicles. Their structure is simple: a lender approves your application to borrow a lump sum to buy your next car, which may be part or all of the purchase price, after which you repay the debt over a pre-agreed term of between one and seven years on a weekly, fortnightly or monthly basis. These typically come without upper borrowing limits, with loans starting from around $5,000.

The ‘secured’ in its name refers to the fact that the asset you purchase (in this case, your car) will serve as collateral for the loan, ‘securing’ it in the process. This means that in the unlikely event you run into trouble and default on your loan, your lender has the right to sell the vehicle as a means of recouping lost funds. However, this is a last resort and there’s no risk of this happening to you if you consistently keep up with your repayments.

This finance product is designed specifically for the purchase of a car, so 100% of your loan’s funds will go towards its purchase. You may be able to take out a loan greater than the full cost price of the vehicle, as your loan can also cover on-road costs such as vehicle registration, car insurance premiums and stamp duty. In many cases, the money will be sent directly from your lender to the vendor, meaning you won’t see the loan funds or have an opportunity to spend them on anything else yourself.

What are unsecured car loans and how do they work?

Unsecured car loans bear many similarities to their secured counterparts. They’re the same in the way the borrower applies for a lump sum with which to pay for their car, after which the debt loan is paid off in instalments over one to seven years. An aspect where they differ is in their borrowing restrictions. You’ll generally only be able to borrow between $2,000 and $75,000 with an unsecured loan, which may rule it out as an option if the cost of the vehicle you’re looking to buy exceeds these parameters.

However, as the name suggests, this type of loan doesn’t utilise any collateral as part of the agreement. Because these loans are unsecured, buyers can purchase whatever type of vehicle they wish, rather than be beholden to the car eligibility requirements set in place by lenders for secured loans (up to ten to 15 years in most cases but can be higher). This means that, in theory, you could be approved for financing if you wanted to purchase a run-down vehicle to strip for parts, which wouldn’t be possible with secured finance.

Another benefit of unsecured loans is that they can essentially be used for anything you wish. If you were looking to buy a car but also wished to consolidate outstanding debts and get a hand covering the cost of renovating your kitchen, you could do so with a single unsecured loan (in theory). Additionally, it’s more common for unsecured loans to come with both free extra loan payments and fee-free early settlements, which could save you a valuable sum overall. However, it’s important to note that unsecured finance is generally the more expensive option when buying a car.

What are the differences in cost between secured and unsecured car loans?

While unsecured loans often offer more flexibility, secured car finance is almost always the cheaper option overall. This comes down in large part to interest rates: secured loans come with lower rates than unsecured loans, as they’re seen as a safer prospect by lenders. The reason why this is the case is simply because secured loans come with greater in-built protections against losing money in the event of a default by the borrower. Unsecured loans have no such protections, and their interest rates are scaled up accordingly. The table below demonstrates how much of an impact a small difference in interest rates can make over the course of a $30,000, five-year car loan:

Type of loan Interest rate Monthly repayment Overall cost Total saving
Secured car loan
5.5% p.a.
$573.03
$34,382.09
$1,686.22
Unsecured car loan
7.5% p.a.
$601.14
$36,068.31
N/A

*Note: estimates do not include other car loan fees that may apply.

There are also fees charged for both secured and unsecured car loans, primarily in the form of establishment and ongoing fees. These come in similar ranges, with establishment fees ranging from $0 to $600 in most cases and ongoing fees charged at between $0 and $10 to $20 per month. However, unsecured loan establishment fees can be as high as just under $1,000, so it’s important to compare your car loan options thoroughly before applying.

Additionally, when negotiating your secured car loan with your lender, there’s generally more scope for certain costs to be waived compared to unsecured loans, which are often completed through a more automated process. By applying with Savvy and speaking with one of our consultants, we can help you secured the most affordable car loan deal for your needs.

What are the benefits and drawbacks of secured car loans?

The key benefits and drawbacks of secured car finance compared to unsecured finance are:

  1. Cheaper loan overall: lower interest rates help borrowers save money throughout their loan repayments, sometimes thousands of dollars’ worth.
  2. Less restrictive borrowing: because there’s no hard upper limit when it comes to most car loans, you can borrow as much as you can afford, rather than stick to your lender’s requirements.
  3. Vast range of finance options: there’s a large number of trusted lenders operating in the market in Australia, with Savvy having over 40 options on our panel to help find you the best loan.
  4. Potential for residual payments: although more common in commercial finance, some financiers will offer the ability to attach a residual to your loan, which is essentially a deposit at the end of the term, to help you reduce your repayments.
  1. Greater restrictions on choice of car: because your loan is secured, your car must hold enough value to recoup lost funds in the event your default on the loan. As such, there are stricter requirements on which cars you can buy.
  2. Fewer early repayment options: although additional payments are generally free, car loans tend to come with a fee if you wish to pay out your loan agreement early.

What are the benefits and drawbacks of unsecured car loans?

The key benefits and drawbacks of unsecured car finance compared to secured finance are:

  1. More flexible loan usage: you can use your unsecured car loan on a range of different expenses, not just the vehicle you’re looking to purchase.
  2. Free early repayments: personal loans often come without any fees for early repayment, meaning you could potentially save hundreds, if not thousands, by paying it off ahead of schedule.
  3. Faster application and approval: because there are no assets involved, the process of applying for your loan and getting your application approved is generally faster.
  1. More expensive overall: thanks to higher interest rates and potentially higher fees, you’ll more than likely end up paying a greater sum for an unsecured loan than for a secured loan.
  2. Lower borrowing cap: the fact that you can only take out a maximum unsecured loan of $75,000 may rule it out as an option for you if the car you’re hoping to buy is more expensive.
  3. Unsuitable for newer cars: because of the increased price, purchasing a brand-new or near-new vehicle with an unsecured loan simply isn’t worth it if at all avoidable.

What other factors should I consider when taking out a car loan?

When looking at car loans, there are a number of factors to keep in mind. These include:

  • Budget: choose a loan that aligns with your budget. Estimate your monthly repayments based on different loan amounts, interest rates and terms to help you determine what you can comfortably afford.
  • Loan term: a shorter loan term typically results in higher monthly payments but may save you money in interest over the life of the loan. Conversely, a longer loan term may offer lower monthly payments but could result in higher overall interest costs.
  • Interest rates: this is the percentage of the loan amount that the lender charges you for borrowing the money. A higher interest rate translates to higher monthly payments.
  • Deposit: the size of your down payment can significantly affect your loan amount, interest rate and overall loan costs. A larger down payment reduces the amount you need to borrow, potentially qualifies you for a lower interest rate and lowers the total interest you'll pay over the loan term.
  • Credit score: your credit score significantly affects your eligibility for a loan and the interest rate you'll be offered. A good credit score can help you secure a loan with a more favourable interest rate, saving you money in the long run.
  • Fees: be aware of any associated fees like establishment fees and early repayment fees, factoring them into your overall loan comparison when choosing a lender.
  • Lender options: don't settle for the first loan offer you receive. Shop around and compare rates and terms from different lenders to secure the most competitive deal.
  • Balloon payments: a balloon payment is a large lump sum payment due at the end of the loan term, which can help lower your monthly payments during the loan period. 
  • Green car loans: explore the option of green car loans if you're purchasing an environmentally friendly vehicle, such as a hybrid or electric car. Some lenders offer specialised loan products with discounted interest rates or other incentives for eco-friendly vehicles.

What are some alternative car loan options?

Secured and unsecured loans are the most common types of finance when buying cars. However, there are some alternatives out there that you may want to consider:

P2P

Peer-to-peer (P2P) finance links borrowers with private lenders directly. You can apply for a car loan through a P2P platform, and your loan request is then presented to potential investors on the platform. If approved, you borrow money directly from these investors, typically at a competitive interest rate compared to traditional lenders. However, there might be stricter eligibility requirements and higher risks involved in this type of loan.

Novated leasing

novated lease is a three-way agreement between a lender, employer and employee. An employee will set aside some of their pay packet to finance the car and the employer then makes payments to the lender. At the end of the term, the employee can decide whether to purchase the car. However, this arrangement is not available with all employers and you don’t own your car until the end of the term. 

Mortgage redraw

If you are a homeowner with an active mortgage, you can use a line of credit or redraw facility to finance a car. Despite a smaller interest rate compared with a consumer car loan, you could be paying more in interest due to the long-term nature of a home loan.

Car dealer finance

Car dealer finance is also an option, though this may cost you more compared with a consumer car loan due to how these loans and packages are structured. Read more about car dealer finance here.

Common questions about secured and unsecured car loans answered

Am I able to use anything else as security for my car loan?

In most cases, no – almost all financiers offering car loans will require you to use the car you purchase as collateral for your agreement. There may be very rare cases where a lender is willing to accept a term deposit or other high-value items as security, but you’re unlikely to be able to do this. Using your car as collateral simplifies the process.

Can I choose between fixed and variable interest on my car loan?

You may be able to choose between a fixed or variable interest rate when taking out an unsecured loan. Fixed interest stays the same across your loan term, while variable rates fluctuate with the market. However, all secured car loans will come with a fixed interest rate, ensuring you’ll be able to accurately budget across the term.

Can I purchase an asset with an unsecured loan for my business?

Yes – you can take out an unsecured personal loan to enable investment in your business. This may be required if your business is new or otherwise doesn’t meet commercial lender requirements relating to trading time and minimum revenue. If you have the option to take out a chattel mortgage, though, your business can take advantage of various tax benefits, such as claiming GST, interest payments and depreciation across the repayment term.

Will I be able to purchase a classic car with a secured loan?

Yes – there are specialist lenders that can approve secured loans for used classic cars upwards of 20 years old. These are generally subject to stricter requirements, however, such as having a strong credit score, being asset-backed and showing verifiable past borrowing.

Can I buy multiple cars with the same loan?

If you’re taking out an unsecured loan, yes – these can be used for any purpose you might need (within reason), so if you’re capable of borrowing and repaying enough to purchase two vehicles, you can do so. However, secured car loans are only designed for the purchase of a single vehicle, so you won’t be able to include multiple cars under one deal.

What happens if my car gets damaged or written off during a secured car loan?

Most secured car loans require comprehensive car insurance coverage. If your car is damaged or written off, the insurance payout would typically go towards settling the loan balance. However, depending on the extent of the damage and your insurance coverage, you might still be responsible for a remaining balance on the loan.

Can I get a car loan if I have bad credit?

Yes – it is possible to get a car loan with bad credit. However, expect stricter loan terms and potentially higher interest rates compared to someone with good credit. You might also need a larger down payment to mitigate risk for the lender. Consider strategies to improve your credit score before applying, such as addressing errors on your report and making timely payments on existing debts.

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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.

The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.

Approval for car loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.

The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.

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