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What is a secured car loan?

A secured car loan is a personal loan to buy a car, where the value of the vehicle being purchased is used as collateral to guarantee the loan.

If you don’t keep up with your repayments and end up defaulting on your car loan, the bank or lender will be able to repossess and sell your car to recover the money they lent you.

How does a secured car loan work?

Putting an asset up as collateral on a loan reduces the financial risk to the lender, so secured car loans typically have more competitive interest rates than unsecured car loans. Additionally, lenders may be prepared to offer a higher loan amount on a secured loan compared to an unsecured loan.

However, if you have a secured car loan, you risk losing your vehicle if you default on your repayments. This could potentially leave you in a difficult position, such as if you were using your car for work or to travel to your job.

How does a secured car loan differ from an unsecured car loan?

There are a few differences between secured and unsecured car loans. Most significantly, unsecured loans are not guaranteed against the value of your vehicle or another asset. This means that if you default, the lender can’t possess your car to minimise their losses, so they are riskier for lenders.  Because of this, unsecured loans tend to charge higher interest rates than secured loans. 

Unsecured loans may offer greater flexibility in terms of how you can spend the money. For example, some unsecured car loans may be used to pay for your car registration, car insurance and other costs. In contrast, secured loans are often limited to the value of the vehicle itself. 

Because a secured car loan is guaranteed by the value of the car, some lenders limit them to purchasing new cars only, or used cars under a maximum age limit. This helps to ensure that the car isn’t near the end of its useful lifespan, and should still retain enough value to secure the loan. Because unsecured car loans don’t need to be secured by a car’s value, you may have some more flexibility in your choice of vehicles to purchase.

What are the pros and cons of a secured car loan?

As a secured car loan is guaranteed against the value of your car or another asset, lenders are less likely to lose money if you default. This means they’re more likely to charge lower interest rates compared to unsecured car loans. 

Secured car loans may be a competitive option for borrowers with less stable finances, such as contractors, the self-employed, or those with poor credit history. This is because the security of the car reduces the risk to the lender. However, be aware that if you default on your secured car loan repayments, you can lose the car itself.

There may also be limitations as to what kind of car you can buy with your secured loan. As mentioned above, some lenders only offer secured car loans for brand new cars, or used cars under a certain age. Others may refuse to offer low rate secured loans for certain car models or sports cars, as these may be deemed higher risks.

How do I compare secured car loans?

Much like home loans, credit cards, and other types of personal loans, it’s important to compare the interest rates, fees, features and benefits of secured car loans to make sure you select an option that suits your needs.

Interest rates

The lower the interest rate you can find, the less your car loan repayments may cost from month to month. You may need to choose between a car loan with a fixed interest rate, which will stay the same for the duration of your car loan term, or a variable interest rate, which may rise or fall during your car loan term, depending on the economy.

Fixed rates can help make your budgeting easier, as you’ll be making the same car loan repayments for the full term, though they may not offer as much flexibility. Variable rate loans could see your repayments increase or decrease, depending on your lender, but you may also be offered greater flexibility around managing your car loan repayments.

Does my credit score affect car loan rates?

The car loan interest rate advertised by a lender may not be the interest rate you end up paying. Banks and car finance providers typically offer their best interest rates to the borrowers who are least likely to default on their repayments.

Borrowers with good credit scores are more likely to be offered lower car loan interest rates than borrowers with bad credit. Your credit score is based on your history of borrowing and repaying money, and indicates to lenders whether you’re a reliable borrower. If you’ve borrowed and repaid loans or credit cards in the past and regularly pay your bills on time, you may have a good credit score. But if you’ve had money troubles in the past, such as defaulting on your payments or experiencing bankruptcy, you’re more likely to have bad credit.

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Comparison rates

Interest isn’t the only cost to consider when choosing a car loan. Many car loan providers also charge fees, including upfront fees and ongoing fees. Sometimes a car loan with a low interest rate and high fees can actually cost more in total than a car loan with a higher interest rate and no fees.

This is where the car loan’s comparison rate comes into play. The comparison rate combines the cost of the loan’s interest with its standard fees and charges, to give you a better idea of the overall cost.

Keep in mind that car loan comparison rates are calculated using pre-set assumptions for consistency, which may not match your car loan exactly, so they may not accurately indicate the true cost of your car loan. Also, not every fee will be included in the comparison rate, so it’s still important to carefully compare different car loan options before making a choice.


Some secured car loans come with special features that could offer extra value to certain borrowers. For example, one popular feature is the ability to make extra repayments, which can bring you closer to paying off your car early, so you’ll be charged less interest. 

Some car loans may also offer the option to redraw your extra repayments from your car loan in case you need that money back in your bank account. Just keep in mind that there may be fees associated with car loan redraws, or fees for making an early exit from your car loan.


While not every lender will charge car loan fees, some of the fees you may encounter include:

  • Upfront fee or establishment fee
  • Ongoing fee
  • Early repayment fee
  • Redraw fee

How much will a secured car loan cost you?

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Loan term

Secured car loans can last for anywhere from one year to ten tears, though many lenders max out their loan terms at seven years.

The longer your loan term, the smaller each of your monthly repayments will be, putting less pressure on your budget. However, because you’ll be making a larger number of repayments, and will be charged interest each time, you’ll likely end up paying more interest on your car in total.

A shorter car loan term may cost you more from month to month, but you’ll pay off your car sooner and pay less interest in total.

How to find the best secured car loan for you

There are several methods available to search and compare secure car loans in Australia.

  • Using RateCity’s comparison tables, you can view a variety of secured car loan options from a range of lenders side by side. Using the filters, you can narrow down your search results until you’re only comparing secured car loans that may suit your needs. You can also sort your list by their interest rates, features, or star ratings.
  • A car loan calculator can help you determine what repayments you can expect on a car loan. Simply enter the details of the car loan you’re interested in to get an estimate of whether it’s likely to fit your budget and financial situation. You can also search for other car loans that may match your calculations, so you can be confident that you're likely to fulfil the eligibility criteria.
  • Real Time Ratings™ is RateCity’s star rating system, which is updated every day. Each car loan’s cost and flexibility are combined into a single star rating, to give you a better idea of each car loan’s overall value at a glance. You can quickly compare some of the top-rated car loans in different categories on RateCity’s Leaderboards, and some of the top-rated car loans receive gold badges as RateCity Award winners.

After you've compared secured car loans, be sure to check the lending criteria before you apply, so you can be confident that your application is likely to be approved.  

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.

What is the principal?

The principal is the value of the loan that is still outstanding. So if a borrower takes out a $20,000 loan, the principal is $20,000. If the borrower repays $5,000 in the first year, the principal is now $15,000.

What are loan repayments?

Loan repayments are the regular payments you make to pay off your car loan. Loan repayments generally occur on a monthly basis, although many lenders will also give you the option of making fortnightly or weekly loan repayments.

What is a balloon payment?

Some lenders will offer borrowers reduced monthly repayments in return for a one-off lump sum – or balloon payment – that the borrower has to pay at the end of the loan. Generally, the total repayments on a loan with a balloon structure will be higher than a loan without.

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

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