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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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Learn more about car loans

How do you get a car loan?

There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.

Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.

What is a car loan?

A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.

What is a loan-to-value ratio?

The loan-to-value ratio, or LVR, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have a loan-to-value ratio of 75 per cent. Loan-to-value ratios change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the loan-to-value ratio would now be 67 per cent.

What is dealer finance?

Dealer finance is a car loan organised through a car dealer – as opposed to car loans organised by a finance broker or directly by the lender.

What is a dealership?

A dealership is a car yard or a place where cars are sold.

What is a loan term?

The loan term is the amount of time the lender gives you to repay the car loan. For example, if you take out a $20,000 car loan with a five-year loan term, you would be expected to pay off the entire $20,000 (plus interest) within five years.

What is vehicle finance?

Vehicle finance, also known as a car loan, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Vehicle finance can be used for both new and used vehicles.

Can you refinance a car loan with the same lender?

You may be looking to refinance your car loan to get lower interest rates or reduce the total monthly amount you have to pay. Often, this leads to the question ‘can I refinance a car loan with the same bank?’

While it’s always worth shopping around for a better deal or at least to compare offers from other lenders, you can sometimes refinance to a different loan with the same lender. It may be simpler,  as the lender already has your details and knows your repayment history. 

Having said that, knowing the terms offered by other lenders may help you negotiate a better deal with your current lender.

Should I service my own car?

There are also costs associated with vehicle ownership, such as paying for petrol and the obligatory ongoing maintenance. But should you cut down on costs by servicing your own vehicle?

If you’re considering getting out the tool box, spanner, and grease-laden towel, you need to carefully weigh up the risks and benefits. A trained mechanic will need to complete certain tasks, while you may be perfectly capable to handle other aspects yourself.

If you’re short on time, it may be worth paying for the convenience of a full vehicle service. However if you’re trying to slash your expenses, there are some basic maintenance tasks that you can complete yourself.

You should call a mechanic if you’re unsure about a vehicle maintenance task you’re about to take on. However there are a number of maintenance tasks that you may be able to complete with your own two hands including:

  • Replacing your car battery
  • Changing the oil
  • Replacing worn windscreen wipers
  • Replacing blown fuses

Remember to keep your car’s body in good condition, by washing and applying a protective wax on a regular basis, too.

Always check your car warranty agreement as some new car purchases come with an extended car warranty provided your services are conducted at the vehicle service centre where you purchased the car. In these circumstances, you may find the service fee is capped, alleviating some of the maintenance woes.

What is an unsecured car loan?

An unsecured car loan is a loan that is not connected to a form of security, or collateral. Not all lenders provide unsecured car loans – and if they do, they generally charge higher interest rates for their unsecured car loans than their secured car loans.

What is a secured car loan?

A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

Where can I get a student car loan?

Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.

A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.

Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.

To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.

What is collateral?

Collateral, or security, is an asset you agree to surrender to a lender if you fail to repay a loan. Generally, the collateral for a car loan is the car itself. So if you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

What is a guarantor on a car loan?

A guarantor on a car loan is a third party, usually a relative or friend, who guarantees to meet the repayments of a loan for the purchase of a car, if the borrower/owner of the car defaults on the loan.

Guarantor car loans can be useful for people who would otherwise struggle in being accepted for credit to purchase a vehicle. These may include people with bad credit, students and young people who may have no credit history, as well as some pensioners.

Many lenders offer guarantor car loans, guarantor personal loans and guarantor home loans, because of the significantly reduced risk to the lender.