Secured car loan vs unsecured car loan

There are some key differences between a secured car loan and an unsecured car loan. And the two types of loans can be useful in different circumstances.

Before you apply for a loan, get the low down on both kinds here, which could help you go into the process with eyes wide open and make a decision that’s suitable for your situation.

A secured car loan is a secured personal loan that’s been created for people buying cars. When you choose to buy a car using a secured loan, you’ll be required to offer up the insured car as collateral to ensure the lender can get their money back regardless of anything that may happen to it or your finances.

What exactly does that mean? Well, if you don’t repay your loan, your lender will want to have a way to ensure they get their money back. When you have a secured loan, they do that by taking your car and selling it. And if for some reason they can’t sell the car (e.g. it’s been stolen or is not repairable after a car crash), they may be able to get their money back through the insurance claim.

Lenders always want to ensure they have a way to get their money back. If a car loan isn’t secured by using the car as collateral, it’s called an unsecured loan. If you fail to repay an unsecured car loan, your lender could take other action against you in an effort to get their money back.

Unsecured loans made especially for cars can be less common. In many cases, if you want to buy a car using an unsecured loan, you’ll need to find an unsecured personal loan.

The most obvious difference between an unsecured car loan and a secured version is that the latter uses the car as collateral, whereas the former doesn’t have any collateral. That may include several consequences, including:

• Different interest rates – it’s a pain having to recover money, and if you’ve failed to repay your loan because you don’t have the money, it can be challenging for a lender to recover the funds. As a result, an unsecured loan can generally pose a greater risk to a lender. To compensate for that risk, some lenders may charge higher interest rates for unsecured loans. (Other fees and charges apply to both secured and unsecured loans. These differ between lenders and may also vary slightly depending on whether a car loan is secured or not)
• Different lending criteria – because of the increased risk associated with an unsecured loan, lenders may look for a stronger loan application with more of a focus on your credit history and credit score when compared with a secured one
• Different car criteria – lenders will generally only give out secured car loans for cars they can confidentially calculate the value of. Older cars are harder to value, so there’s generally a limit on how old a car can be for a secured loan.

As with all kinds of loans, there are a range of advantages and disadvantages associated with each kind of loan. Here’s a breakdown of some of the most common.

Secured car loans are generally more common and can suit a wide range of people. Some people prefer them because they may provide fees and cost savings, meaning the total cost of the loan is could be lower. You may also be eligible for one or more fee waivers if you’re getting a secured loan for a brand-new car (e.g. you may have to pay a car valuation fee if you’re buying a second-hand car.

However, depending on your circumstances you may prefer a loan that doesn’t rely on your car being collateral. In other cases, some lenders may not offer a secured loan option for the car you want, reducing the choices available to you. This may be the case if you are not purchasing a car that’s new enough to meet the criteria for a secured loan.

It may be slightly easier to get a secured loan because that kind of loan usually carries less risk for the lender, and so they may have less stringent lending criteria. (So, you might find it easier to get a secured loan even if your credit score isn’t as good.)

Yes, you can repay a secured loan early. Some lenders will charge a fee if you repay your secured loan early. But not all will.

Many secured car loans tend to be for somewhere between 3-7 years. The loan length will be specified in the loan terms and conditions. You may be able to negotiate this aspect of the loan with your lender.

While a longer loan term may seem appealing because it can reduce the repayments, a longer loan term will generally cost you more overall.

Applying for a secured car loan is a lot like applying for any other kind of finance. The main difference is that you’ll have to provide details of the car you want to buy and the insurance you take out on it. This is very similar to getting a home loan.

The steps might include:

• Choose the car that meets your needs and wants
• Compare a range of loan options (we’ve got a great range of car loans in our car loan comparison page)
• Fill in the loan application form and provide the required documentation (usually proof of your identity, income, usual expenses and debts, plus those details about your car and insurance)
• Wait for the loan offer and approval
• Read and sign the contract
• Enjoy your car! (And meet your payment obligations)