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Should I secure my car loan?

Should I secure my car loan?

When it comes to choosing a car loan, it pays to be as picky as you would be when choosing the actual car.

There are several features you should examine when comparing car loans and picking between a secure or unsecure loan is one of the most significant.

Secured Car Loan

A secured car loan refers to a type of car loan in which lenders generally use the purchase as an asset for security against the loan. Some lenders are also willing to use property, term deposits or other assets such as jewellery as security against the loan. A secured car loan usually also has a lower interest rate than an unsecured loan due to borrowers offering security posing less of a risk to lenders.

Unsecured Car Loan

Unsecured car loans do not require security to be held against the loan. However, you will need to prove that you can make the repayments through a good credit history, your ability to save, or if you previously had a personal loan or credit card and met the repayments. As this type of car loan is riskier due to the lack of security, you will usually incur higher interest rates and/or not be approved to borrow as much as you would on a secured loan.

What loan type is right for you?

Secured loans are a competitive choice for borrowers looking to take advantage of lower interest rates and higher borrowing amounts, as they allows you to appear as less of a risk to lenders. However, if you’re a reliable borrower with a history of paying off debt, an unsecured loan may work for you, as you will not run the risk of losing the purchase in the event you can’t pay back the loan.

Some lenders also only allow new vehicles (two years or younger) to be used as security, with older cars needing to pass vehicle inspection checks.

Regardless of your loan type, if you cannot pay back your car loan and your car has devalued past the point of the outstanding balance, the lender can take you to court for the remainder.

Pros of secured loans
  • You’re seen as lower risk to lenders
  • Lower interest rates
  • Parents can sign as guarantor
  • Can borrow a higher amount
Cons of secured loans
  • If you default, the lender will claim the security
  • Some lenders only accept new vehicles (less than two years old) as a guarantee
  • If your car devalues, the lender can still take you to court to pay the balance – car is not a 100% safe back up


What else should you consider?

Apart from secured vs. unsecured, you’ll need to examine and compare a few more factors before deciding which car loan is suitable for you.

If budgeting is your main concern, you’ll want to consider the type of interest rate for the car loan. You may be leaning towards a secured car loan with a lower interest rate, however, if the rate is variable it may be harder to budget for, as your repayments may change every month. Both secured and unsecured car loans can have either a fixed or variable rate, depending on the lender’s product.

You’ll also want to examine the loan fees involved and whether any upfront or early exit penalty fees apply to fully calculate the total amount you will pay over the lifetime of your loan. Checking the comparison rate of a car loan is a great way to estimate its overall cost. 

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