A secured car loan is a type of vehicle finance in which your purchased car is used as collateral, or in finance terms as a “security”, against the loan. This reduces the risk on the lender’s part and in turn, you are offered lower interest rates compared with unsecured loans. Beware: if a borrower defaults (fails to pay back) a loan, the lender may repossess your vehicle to recoup their costs.
Secured car loans have many advantages over unsecured loans such as personal loans. The first advantage is a more competitive interest rate. Secured car loans will usually (though not in all circumstances) have lower interest and/or comparison rates than similar unsecured loans. This is because the lender is taking on less risk by using your purchased vehicle as security.
You may be able to choose between fixed and 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 a certain percentage throughout the lifetime of the loan. Variable loans are more flexible in terms of making extra repayments, as you are generally not charged fees for paying out the loan early. Fixed rates are easier to budget for, as repayments are the same every week, fortnight, or month.
Some lenders may allow you to buy certified used or used vehicles with a secured car loan. In some instances, cars up to 12 years old can be financed using secured car loans.
As with any credit product or financial decision, you need to determine if you can afford the repayments and other expenses associated with buying a car on finance. This includes registration, fuel, comprehensive car insurance (which many lenders will insist upon if your car is the security), and maintenance.
Unlike unsecured personal loans, your lender will only give you enough money to cover the cost of purchase; other expenses will need to come out of your pocket.
If a borrower defaults on their loan, the bank or lender is legally authorised – in most circumstances – to repossess the vehicle in order to cover their losses.
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 or 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.
|Lender||Product Name||Advertised Rate||Comparison Rate||Monthly Repayment|
|Savvy||New Car Loan|| 2.85% |
|Bank of Australia||Used Car Loan|| 6.45% |
|ANZ||Online Secured Car Loan|| 7.85% |
|CUA||Fixed Rate Car Loan|| 7.99% |
|BankSA||Secured Fixed Personal Loan|| 8.49% |
|St George||Secured Fixed Personal Loan|| 8.49% |
|CBA||Secured Car Loan|| 8.49% |
|NAB||Variable Rate Personal Loan|| 14.19% |
* Commercial loan with the loan amount of $40,000 is looking at a 5 year secured fixed rate of 2.85% p.a. and comparison rate of 3.93% p.a.. WARNING: all fees and charges may not be included on the example above, only the comparison rates, monthly repayment and total cost applies. Therefore, the total cost of the loan might be different. Comparison rate do not include broker fees, redraw fees, early termination fees and fee waivers. Comparison rate may change as a result of the different loan terms, fees and the loan amounts. Establishment fees and monthly fees do not apply to commercial loans, only consumer loans. However, there might be different fees apply.
Though the risk of default can be scary, the real rates of repossession are minimal.
According to the Fitch ‘Dinkum’ Automotive Asset Backed Securities index, loan “delinquency”, or the rate of default is extremely low in Australia. In the June quarter of 2017, the rate for secured car loan defaults was 0.44%. The 60+ days in arrears rate was 0.8%. According to the report, Fitch determined that “losses remain low” over a five-year average. This is in a marketplace for new car finance commitments that totalled $35.7 billion for all of 2017.
Repossession only occurs after a borrower is behind on their payments, has been served with a 30-day default notice which is not paid after another 30 days. A lender can initiate repossession if a borrower has not paid the overdue amount, nor negotiated a resolution, or lodged a postponement of repossession request through a hardship variation.
If a defaulter owes less than $10,000 or 25% of the loan amount, a credit provider cannot repossess their car without a court order or your written consent to enter your property. If a defaulter leaves their car on public property, e.g. parked on the street, a lender may legally tow the car away.
Remember: all consumer car loans are regulated by the National Consumer Credit Protection Act 2009. This means an accredited lender must ensure a prospective borrower has the capacity to pay off a loan without experiencing financial hardship before approving an application.
If you are a business owner or are intending to use your car for business use over 50% of the time, you can take advantage of what’s known as a chattel mortgage or hire purchase. Both are functionally similar: you take possession of a vehicle while paying off a type of secured loan. The difference between them is where ownership lies. In the case of a hire purchase, the lender “owns” the vehicle on paper.
Chattel mortgages allow you to borrow more than the car’s value to fund registration, insurance, and other costs. As a business transaction, you can claim your GST, interest, depreciation, and the fuel input tax credit. You could also take advantage of the Federal Government instant asset write-off, which is valued at $30,000 as of Financial Year 2019-20.
For more information on chattel mortgages, consult a business finance professional.
Since the loan is tied to the value of the car, your lender is prepared to offer more competitive interest rates than comparable unsecured loans.
Get a choice of fixed rate loans to help you budget or variable rate loans that allow you to pay off your loan earlier without penalty.
Whether you’re buying new, used, or certified used, lenders consider all types of car purchases from dealers and private sellers.
Since your car is used as collateral, you must be careful to make sure you keep up repayments or risk default.