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Are car loans secured or unsecured debt?

Are car loans secured or unsecured debt?

When it comes to purchasing a new or used car, you may need to source finances in the form of a car loan. A car loan is a personal loan that you use to purchase a vehicle. You’ll be paying the principal amount and the interest on it over a fixed period, usually between 1 and 7 years.

When looking at car loans, you may be wondering if it’s a secured or unsecured debt; well, it could be one or the other. Choosing the right loan that offers a reasonable interest rate and other features may save you a ton of money in interest and fees.

Secured versus unsecured car loans

When shopping for car loans it is important to understand whether car loans are secured or unsecured debt. The answer is that they can be both, so check which type of debt your lender is offering you.

A car loan can be a secured debt or ‘secured loan’. A secured loan is where you offer an asset, like a car, as collateral for the loan. If you cannot repay the loan, the lender can take possession of the vehicle and sell it to try and recover some of the money you owe. This gives the lender some security and financial protection in case you’re unable to repay. If your car gets repossessed and sold for less than what you owe the lender, you’ll have to pay the lender for the shortfall.

A car loan can also be an unsecured debt. An unsecured loan does not have any assets acting as collateral for the loan. If you cannot repay the loan, the lender will need to get a court order before taking your assets and selling them to repay the outstanding loan amount. Unsecured loans pose a more considerable risk for lenders, so they are usually harder to get.

The difference between secured and unsecured car loans

Here’s a quick and easy comparison that highlights the difference between secured and unsecured car loans:

Secured Car LoansUnsecured Car Loans
Your car will act as the security for the loan.Your car is not given as security for the loan.
Lenders usually offer secured car loans for buying new vehicles.Unsecured car loans are generally available for used cars.
The lender may recover the outstanding amount by repossessing your car and selling it.There is no underlying security asset, so there is no threat of repossession.
Secured car loans tend to have a higher loan amount and a lower interest rate.Unsecured car loans tend to have a reduced loan amount and a higher interest rate.

What else to consider about secured car loans

If you’re planning to buy a second-hand car, it’s important to remember that the previous owner might have used it as security for a car loan. If that loan is still unpaid, the lender can repossess the car, even if you’ve just bought it.

To help avoid this from happening, you have to perform your due diligence before buying a car. The seller or the previous owner may not disclose these details.

You can check the Personal Property Securities Register (PPSR) to see if the car has already been bought via a loan or is currently being used as collateral. The PPSR is a national register for personal property over $5000, including cars. You’ll have to pay a fee to check the register, but it will be able to show you if there are any loans currently holding the car as security and you can conduct this check anytime.

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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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