Car loans can be secured or unsecured, and the one you choose will have a big impact on everything from the interest rates and deposits to the fees and charges associated with establishing the loan.
Check out the following guide for more info on secured and unsecured loans:
A secured loan is a personal loan that’s “secured” against an asset, in this case, the car. If you fail to meet the terms of the loan agreement, the lender can repossess the vehicle and use it to recover their costs.
It provides the lender with some collateral, which reduces their risk.
You don’t have to use the vehicle as collateral. Some lenders will also accept property and luxury goods.
An unsecured loan is not secured against the car or any other assets. The result is that the lender takes a bigger risk. The lender still has recourse for action if you fail to meet your repayment obligations, but the process is a little more complicated and they may take you to court.
Lenders are all about risk. They plug your information into an algorithm to determine your level of risk and they use this to set the interest rates, along with factors such as the market rate.
If you have a bad credit history, minimal income, and very few repaid loans, you’ll be considered high risk and will be given higher interest rates. If your history is clean and you’ve proven your creditworthiness, those rates will be low.
A secured loan, like a clean credit history, reduces the risk and should lead to lower interest rates. The average rate for a secured auto loan is around 7%, and this jumps to between 10% and 11% for unsecured loans. Of course, these are just averages, and the quotes you receive could be a lot higher or lower.
But if you compare an unsecured loan to a secured loan, the latter should have a lower interest rate.
As far as interest rates are concerned, secured loans are better than unsecured loans, but there are other considerations.
Secured loans are often limited to higher-value cars, as well as newer vehicles. They could be the perfect option if you’re looking to secure the best interest rates on a new or nearly new vehicle.
But of course, if you don’t meet the repayments, you risk losing the car.
The loan-to-value (LVR) options also differ on secured and unsecured loans. LVR is the total amount you’re borrowing compared to your deposit. So, if the car is worth $20,000 and you only have a $2,000 deposit, it means the LVR is 90%, as you’re borrowing 90% of the value. This might not be enough to qualify you for a low-rate secured loan, so you’ll either need to get a different car or increase the deposit.
As for unsecured car loans, you don’t need to put up collateral and thus won’t risk losing the vehicle. More importantly, you have a larger selection of vehicles to choose from and may have more options when it comes to cheaper cars and second-hand cars.
But of course, the interest rates are usually high, so you may spend more cash over the long haul.
It depends. In most cases, secured auto loans are the way to go. The lower interest rates will save you more cash and reduce your level of responsibility. But if you want a second-hand car or a car valued at less than $10,000, unsecured auto loans are best.
Make your decision on a loan-by-loan basis. Find the car you want, consider the cost and deposit, check with lenders, and see which loan type provides you with the lowest rates and the best terms.
Just because the loan is secured doesn’t mean they’ll be quick to repossess if you fail to pay. The best-case scenario for the lender is that you keep meeting your monthly payments and then eventually clear the loan. Sure, they can repossess to cover costs, but it’s a lot of paperwork and a lot of hassle, and as they typically sell cars through auctions and get less than market value, they may not recoup all their costs.
Just because the loan isn’t secured, doesn’t mean you can take the terms lightly. The lender may take legal action against you, and this could mean getting a visit from a debt collection agency or even being called for a court appearance.
It depends on the interest rate, car, and value of the loan, among other things. If we assume a loan term of 5 years, an interest rate of 7.5%, and a total loan amount of $30,000, you can expect to pay about $619 a month. Increasing the interest rate to 10% will bump up the monthly cost to $656.
Yes. Car loans are basically just types of personal loans, and these can be used for many different purchases. You can take out a personal loan for home improvements, holidays, or major purchases, for instance. Some can be secured, others cannot. Check the lender’s terms and conditions or speak with a loan specialist for more information.
The most common form of secured loan is a mortgage, as it is secured against the property; the most common unsecured loan is a credit card, as it’s not tied to an asset.
The one that works best for you will depend on whether you’re buying a new or used car, as well as how much it costs and how big your deposit is. For some helpful advice, contact a Fox Finance lending specialist, as we can help you find the best loan with the most reputable lenders.
Nathan joined Fox Finance Group in 2018 to help drive the strategic growth of the business and also help build on the solid foundations that have held strong in the business since 2006.