An unsecured car loan is a type of consumer car loan where your car is not used as collateral or a security for the loan. Instead, a lender will determine eligibility using a borrower’s credit score or overall creditworthiness. In exchange for taking on more risk, your bank or lender will usually charge a higher interest rate in comparison with a secured car loan. Unsecured loans may also come with a fixed or variable interest rate.
Unsecured car loans are a type of car loan that does not put up the car as collateral. As such, lenders will look at a borrower’s creditworthiness, or ability to pay back a loan, instead.
Lenders may approve unsecured car loans even to bad credit customers, but their interest rates will be significantly higher than those customers with good or excellent credit.
In Australia, credit reporting agencies give customers a credit score based on creditworthiness. These range from 0 to 1200, with others using a 0 to 1000 scale.
Lenders reward lower risk borrowers with more competitive interest rates or access to specialised lending products. Higher risk borrowers may gain approval with a higher than usual interest rate.
If you have good or excellent credit, an unsecured car loan may be an appealing alternative to a secured car loan as you won’t need to put up your car as security. In a secured car loan, your car is collateral in case you do not pay back the loan, known as a default. In this situation, a lender has the right to repossess the car if you default. In an unsecured car loan, you are at little risk of losing the vehicle to repossession.
Since the loan is unsecured, you can buy any type of car you wish. These could be older cars (older than 10-12 years), vintage cars, sold via private sale, through auction, and other marketplaces.
Unsecured car loans can be more flexible than comparable secured car loans. Since loans are unsecured, you may be eligible to borrow more than the car’s value to pay for registration or insurance, or to consolidate other debts.
A few unsecured car loan products may also include redraw facilities. This allows you to withdraw payments you’ve made from the loan, using it as a line of credit. These are quite rare and subject to terms and conditions.
As with any loan, you need to figure out how much you can afford in repayments each month or chosen period (fortnightly or monthly.) You can use a car loan calculator to figure out how much you can afford to borrow. You’ll need to know the approximate cost of the car you need (or size of the loan, if you are using it for other debts or items), the interest rate, and the length of the loan term.
Lenders will usually reject applications that ask for more money than you can pay back in a reasonable timeframe – this is part of a lender’s obligation to be a responsible lender. Aim for a vehicle that’s well within your affordability to maximise your chance of approval.
When looking for loans, try to find a lender’s comparison rate over their base interest rate. A comparison rate also includes most fees and charges in the rate specified, so you get a more complete picture of what you’ll be paying in repayments (by using the car loan calculator.) Comparison rates make it easier for borrowers to look at similar loan products as a like-to-like for features, amounts, and loan terms.
You should also check your credit score at this stage. This will be the biggest factor in whether you’re approved for an unsecured loan. A credit score – usually between 800-1200 (or 750-1000) – is considered “good” to “excellent.” If you can prove you have a stable financial situation, lenders will also factor this into your creditworthiness rating.
You should compare unsecured loans online or use a car loan broker. A car loan broker can find many different unsecured car loans from their panel of lenders. This can often lead you to get a more competitive rate than going it alone, which can prove time-consuming.
Next, you’ll need to see if you clear the eligibility criteria for the loan. If so, you can proceed to your application. Your lender or broker will ask for identification and financial statements. Provide them as quickly as possible, as any delays will slow down the process.
Once approved, you’ll either be given the funds or your lender or broker will arrange for funds to be transferred to your dealer or car merchant.
|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.
According to the Royal Commission on Financial Services Background Paper 3, the typical household looks like:
In the regions, this household looks like:
The average weekly car loan payment around Australia was estimated to be about $122 in capital cities and regional areas; it also is the largest expense relating to vehicles.
The Royal Commission saw that the average car loan size in 2017 was $39,445 and the median loan size was $31,003. The most popular (mode) loan size was $20,000. Men also borrowed $5,000 more on average compared with women.
Finance commitments (loans) for new cars and motor vehicles were equivalent to 2% of Gross Domestic Product, which is 2% of all the goods and services produced and consumed in Australia.
Most Australians are making good decisions when it comes to car financing before looking to buy new vehicles.
Research from the Royal Commission showed 33% of buyers went to a finance broker website and 16% of buyers used a broker to secure financing.
Customers who apply and gain approval for loans spend a lot of time considering their options before visiting a dealership.
81% of consumers researched finance options online, 76% of consumers considered their finance options prior to test driving a vehicle and 51% of consumers chose a lender prior to visiting a dealership.
Unlike secured car loans, which have a fixed interest rate, unsecured car loans give borrowers an option for a fixed or a variable rate. A fixed rate means the interest rate is locked in for the term of the loan. A variable rate may go up or down depending on the market.
The biggest factor in setting a market rate for interest is the Reserve Bank of Australia. If the “official cash rate” goes up, so do your repayments. This can prove troublesome for budgeting. However, if the cash rate goes down, your repayments are cheaper. Talk to a financial professional before considering a variable rate car loan. Variable interest rate loans also have fewer penalties for paying the car loan off early compared with similar fixed rate loans.
Having a deposit for the car means you are taking the risk away from the lender, since they’ll lend less money to you overall. This can help your application for an unsecured car loan.
Lenders may be hesitant to lend out money to people at the limit of their borrowing power. Aim for a vehicle that’s well within your affordability to maximise your chance of approval.
If you have a good borrowing power and high disposable income, lenders will look upon this favourably in determining your creditworthiness. A stable residential history is also a lower risk for lenders.
Knowing if your credit score is in the Excellent range will indicate whether you are eligible for an unsecured car loan. A score from 850-1200 is considered “Excellent.”
If your credit score isn’t quite there yet, you may have to pay off some debts or close credit accounts you are no longer using. In a few months, you will notice that your credit score has improved.