If you’ve ever researched car loans online, you’ve probably encountered “secured loans” and “unsecured loans”.
These terms can be confusing at first, so we’re going to demystify them.
In this article, we’ll cover the difference between secured and unsecured car loans, their unique pros and cons, and factors to keep in mind when choosing the right loan for you.
What is a secured car loan?
Simply put, a secured car loan provides more security to your lender. The “security” element tends to be what you’re purchasing with the loan, also known as the loan “collateral”. For example, if you get a secured loan to buy a car, the car will act as the collateral on your loan. This means that if you can’t repay your loan, your lender can repossess your car, sell it, and use that money to recoup the cost of your loan.
Secured car loan pros;
- Lower interest rates and fees due to lower risk for the lender
- Higher borrowing limits because the security guarantees the loan
- Better chance of approval as your creditworthiness is less important
Secure car loan cons;
- Risk of repossession if you fail to make your repayments
- Longer loan terms because secured loans are often for higher amounts
- Maintenance responsibilities because you need to maintain the value of the collateral
What is an unsecured car loan?
In contrast, unsecured loans do not require you to supply any collateral and don’t have to be used for a specific purpose. For example, a credit card is a form of unsecured loan and, as long as you make your repayments and don’t exceed your limits, you can use it to buy anything you want.
These factors make unsecured loans much riskier for your lender. As such, they’ll pay more attention to your credit score when reviewing your application and proposing loan terms.
Unsecured car loan pros:
- No risk of losing your car if you fail to make your loan repayments*
- Flexible use of funds compared to secured loans
- Shorter loan terms because they’re often for smaller amounts
*But your lender may take you to court to try to recoup their loss
Secured car loan cons:
- Higher interest rates because of the higher degree of risk for the lender
- Stricter eligibility requirements to ensure you’ll be able to make all repayments
- Lower borrowing limits due to lack of collateral
Factors to consider when choosing a car loan type
1. Your credit score
Learn more about how you can improve your credit score in our previous blog.
The quality of your credit history will play an integral role in determining the kind of loans you can access. If your credit score is low, you’ll probably only get approval with favourable loan terms on a secured loan. If your credit score is high, you’ll have more options and can choose the loan that best suits your specific needs.
2. Interest rates and total loan cost
Secured loans are often associated with lower interest rates. This can make them seem more budget-friendly, but that’s not always the full story. Because loan terms are often longer for secured loans, the amount of interest you pay over the course of the loan can stack up as the years go by. There also tend to be barriers to early repayment, such as additional fees. As such, an unsecured loan may be a better choice if you know you’ll be able to pay off your loan in a short amount of time.
3. Risk tolerance
If risk is your main concern, it’s hard to go past a secured loan. Because the loan is secured by collateral, your risk of being out of pocket if you default on your repayments is very low. However, there is one risk to keep in mind: if you damage the collateral (e.g. you’re in a car crash), fail to undertake appropriate repairs, and the lender then repossess the asset, they may pursue you legally if they can no longer realise the expected value of the collateral to pay off your loan. That’s why it’s essential to ensure your car is maintained and insured in accordance with your lender’s requirements.
Choose Yes Loans for quick and easy car loans online
Our expert team is here to help you get your next car with the best possible low-interest auto financing. Our online application process is fast, simple and personalised so you can make your purchase with confidence.
Ready to find out more about Australia-wide and Perth car finance options? Get in touch today. We say YES more often.
