Secured vs. Unsecured Car Loans

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, updated on July 4th, 2023       

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The differences between secured and unsecured car loans

There are many ways to go about financing your vehicle purchase if you aren’t paying for the whole thing in cash upfront. 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.

You can find out all the key information you need right here with Savvy to help you make the right call on which car loan is best for you. Start the comparison process with us today and get a quote before you know it.

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.
Unsecured car loan
7.5% p.a.

*Note: estimates do not include other car loan fees which 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 (although Savvy can help you get approved for a secured car loan for any age vehicle).
  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.

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 – at Savvy, we’re partnered with specialist lenders who 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.

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