Are you in the market for a new or used car loan? Do you have a good credit rating and a steady, stable income? If you're a reliable borrower, and don’t want to use the vehicle you are buying as collateral, an unsecured car loan might work well for you.

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What is an unsecured car loan?

An unsecured car loan is when a credit provider lends you an amount of money that is not secured by the value of an asset. As there is no collateral, if you default on your loan repayments, your lender cannot repossess the vehicle you have purchased with the loan.

Most car loans are secured, as this reduces the financial risk on the lender. If you default on your repayments, the lender can repossess the asset used as security. The asset used as security is typically the vehicle purchased.

Types of Unsecured Car Loans 

Fixed Rate: As the name suggests, unsecured car loans with fixed rates charge the same interest rate during the entire loan term. That means that borrowers agree to pay a set amount of interest as part of their regular loan repayments, so repayments never change. This certainty can be appealing, but it could also mean borrowers miss out on rate cuts, because the rate stays the same regardless of whether the lender’s interest rate drop.

Variable Rate: Unsecured loans with variable interest rates means the interest rate on the loan may change during the loan’s term, so your repayments can change too. You can save money if there’s a rate cut, as your repayments will fall. However, if your lender raises the rate, your repayments would increase, and potentially leave you out of pocket if you have a strict budget.

Which is best, fixed or variable?

The best decision for you will depend entirely upon your financial situation.

If you have a strict budget, and you need to know exactly what your repayments will be, a fixed loan may be best. However, you need to be aware of the potential savings you could miss out on if interest rates fall.

If you opt for a variable rate loan, you will get the benefit of rate cuts. However, your loan repayments would rise with any rises in official interest rates. Given that scenario, it might be wise to work on the assumption that your interest rate will eventually rise by up to 3 percentage points, and budget accordingly. This means if your lender does increase the rate on your loan, you will still be able to make your repayments.

 

How to find the best unsecured car loan

As with all financial products, the best unsecured car loan will depend upon your own financial situation, including your spending and saving habits.

Is it better to get a secured or unsecured car loan?

The main benefit of a secured car loan is that interest rates can be lower. This is because the lender sees this type of loan as less risky, as the car itself or an asset of value is used as collateral. However, if something happens and you can't make your repayments, the lender can repossess the vehicle or asset used as security. This is the main downside.

Benefits of an unsecured car loan

Although borrowers may by charged a higher interest rate on an unsecured car loan, there are advantages to taking out a loan that does not require collateral as security.

Choose the amount you borrow: With an unsecured loan, you can borrow any amount you wish, as long as you prove that you can make the repayments. This amount could include the value of the car as well as other associated costs including insurance fees, registration costs and potentially repairs needed on the car if it is used.

No risk to your property: If you rely heavily upon your car for daily use and don’t want to run the risk of repossession if you cannot make your payments, an unsecured loan could be right for you. Even if you can’t make repayments, you would still have access to your car.

Lower interest rate than other credit: An unsecured loan will most likely charge a higher interest rate than a secured loan, but a lower rate than credit cards or short-term personal loans. If you’re deciding between an unsecured loan and a credit card or short-term personal loan, try creating a table to analyse and compare all fees, charges and rates, so you can make the best financial decision.

Disadvantages of an unsecured car loan

The main disadvantage of an unsecured car loan is that there is a higher financial risk to the lender, so they typically charge higher interest rates and possibly fees and charges.

Higher interest rate than secured loans: Unsecured loans will most often have high interest rates, due to the financial risk associated with giving a loan without security. Also, make sure to investigate all the fees and charges, as this is often where the lender makes money on the loan.

Strict rules on which borrowers qualify: The eligibility criteria is much stricter for unsecured loans than secured as there is no collateral on the loan. Borrowers must have a good credit rating, proof of income and expenses, and sometimes lenders will ask for a deposit to add to security.

Lenders can take legal action: If you do not make your repayments on an unsecured car loan, you will still have access to the vehicle, but could face legal action. Lenders and credit providers can turn your debt over to a collection agency, or file a civil lawsuit to recoup the money that’s owed to them.

Things to look out for with an unsecured loan

Before you decide that an unsecured loan is the best option for you to get behind the wheel of your dream car, there are a few things you need to consider.

Comparison rates: A car loan’s ‘comparison rate’ offers a simpler way to work out approximately how much an unsecured car loan can cost you. Expressed as a percentage, this figure combines the loan’s advertised interest rate with its standard fees and charges. This can then be used as the “interest rate” to calculate the total amount you will pay over the loan term.

Keep in mind that even a car loan’s comparison rate may not take its every cost into account – some non-standard charges and expenses could apply on the loan and not be included in this figure.

Fees for extra repayments: By making extra repayments and paying your car loan off early, you may think you’ll be saving money by reducing the total interest you pay over the lifetime of your loan. However, some lenders charge fees for making extra repayments or paying out a loan early. So, check whether these charges apply to the line you're considering. These fees tend to be more common with fixed rate car loans, though they are sometimes also found in variable rate car loans.

Loan to Value Ratio (LVR): If you don’t have a deposit for your unsecured car loan, you can borrow a greater percentage of your car’s value and smaller upfront deposit. Some unsecured car loans or online lenders will offer 100% of the loan amount, but keep in mind these types of loans are seen as even higher risk, and have much higher interest rates.

Frequently asked questions

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.

How to find a great car loan

Historically, finding a great car loan would require excess research ranging from visiting an excess of websites or making phone calls, but technology has moved on. Using RateCity, Australia’s leading financial comparison service, you can check out great deals from a range of lenders on the one site.

To start, select the amount you want to borrow and the length of the loan, narrowing your search to show just fixed or variable interest rate results.

Once you’ve indicated your search criteria, you’ll see an immediate list of lenders, ranked by interest rate or application fees. You’ll also be able to view the monthly repayment amount for each result, helping you to know what you can afford.

Up to six products can be compared side-by-side, complete with more information about each car loan, giving you more information about your options.

When comparing your car loan options, it’s ideal to keep in mind some points find a great car loan for your needs. Consider the following:

  • Choosing a low interest car loan can reduce costs
  • Selecting an option with low fees and charges is ideal, because these can really add up
  • Be aware of penalties, such as early exit penalties if you pay off the loan sooner than expected
  • Consider the features that best suit your situation

There are many ways to ensure that you get a great car loan. Ultimately, you’ll end up with the best deal by doing your research and selecting the most suitable product for you.

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 guarantor car loan?

A guarantor car loan is a type of loan that features a guarantor on the agreement. The guarantor is a third-party individual, often a friend or relative, who guarantees the loan will be repaid if the borrower defaults on the car loan.

Guarantor car loans are often geared at people who might otherwise struggle being accepted for a secured car loan when purchasing a vehicle. Some of the reasons might include a lack of credit history such as with a student or young person, if there’s bad credit, or age as a factor such as with pensioners.

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.

Can I get a discounted student car loan?

Being a student is tough enough, and while you might find the odd student discount on movies and technology, the same can’t be said about car loans, as you can’t really get a discounted student car loan.

Lenders make money on the interest and fees that they charge with loans, and the lowest interest and fees are given to the most reliable credit holders: people with excellent credit history.

As a student, you are unlikely to have enough on your credit report to warrant an excellent history. There are however, ways of getting a lower interest car loan if you can’t get an interest-free loan from the bank of mum and dad. One way of doing this may be through getting a guarantor car loan, which can get you a secured car loan by setting your parents up as guarantors.

What is the role of a guarantor on a car loan?

The role of a guarantor on a car loan is to meet repayments if the borrower of the loan were to default for any reason, such as not being able to afford it.

Useful for loan applicants with poor or bad credit, a guarantor makes it possible for these loans to be made secure, because there’s less risk for a lender overall.

Companies will likely give fair warning before they charge a guarantor for the costs of the loan, or before they repossess anything of the guarantor’s that may have been used as security. Still, it is important for a car loan guarantor to fully understand their responsibilities before they commit to the transaction.

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.

Can I get a car loan with poor credit?

Poor credit doesn’t necessarily mean you won’t be able to get finance for your car purchase, though your options aren’t likely to be the same as someone with good credit.

In fact, a number of specialist lenders exist offering car finance for customers with poor credit, able to provide access to bad credit car loans.

However having a history of poor credit will likely mark you as a potential risk to lenders, so your car financing needs could see higher fees and interest rates. Alternatively, consider a secured car loan, which is a type of loan that uses the car you purchase as collateral, reducing the risk.

Other options include getting someone close to act as a guarantor for your car loan, or to talk to a broker about a personalised rate specific to your circumstances.

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 fixed-rate loan?

A fixed-rate loan is one where the interest rate remains constant for an agreed amount of time. For example, if you take out a five-year fixed-rate loan at 8.75 per cent, the lender is obliged to leave your interest rate at 8.75 per cent for at least five years. By contrast, if you take out a variable-rate loan at 8.75 per cent, the lender can change the interest rate whenever it wants.

What is a dealership?

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

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 CTP insurance?

CTP insurance, also known as compulsory third-party insurance or a green slip, is compulsory if you want to register a vehicle in Australia. If you’re responsible for a car accident, your CTP insurance will be used to pay any compensation due to anyone who might be injured or killed. However, CTP insurance doesn’t cover you for vehicle damage or theft.

What is proof of income?

Before giving you a car loan, lenders will ask for proof of income – documentary evidence that you earn as much as you claim you earn. Lenders will typically want some combination of tax returns, pay slips and bank statements. The reason lenders want proof of income is because they want to be sure you have the means to repay the car loan.

Can you put a deposit on a car to hold it?

It’s up to individual car dealers to decide whether to promise to hold on to cars in exchange for deposits.

Some car dealers will request a deposit and promise, in return, to hold on to the car for a certain period of time. Others will request a deposit but make no guarantees, other than to return the deposit if they end up selling the car to someone else.

Some car dealers ask for deposits; others don’t. If you get asked for a deposit and you decide to pay it, make sure the dealer gives you signed paperwork before you make the payment and a receipt after you’ve made the payment.

Can I buy a car as a student?

Buying a car is a huge financial decision, and shy of marriage and purchasing a house (or perhaps around the world travels), it may be the biggest financial decision you make. But if you’re looking at your empty pockets, don’t despair! Your dream of owning your own car could become a reality, if you look for and compare the right car loans for your circumstances.

Can I get a car loan if I am on disability benefit?

Yes, there are some lenders who will consider your application if you are on a disability pension. As long as you have an income, usually of over $400 a week, there are lenders that are willing to supply you with a loan.

There are also micro-financing charitable organisations that provide low interest loans for people on low incomes for certain necessary amenities, such as cars, if they match the specified criteria.