If you’re thinking of taking out a car loan, you have two major options – a secured or an unsecured car loan. It’s crucial to understand the key differences between the two.
Read on to find out everything you need to know, including answers to FAQs about both these major types of car finance.
‘A loan that is backed by an asset’ is the official secured loan meaning in financial jargon. When you define secured loans in that way, the meaning of a secured car loan is probably as clear as mud to you.
Let’s explain secured loans in simple, layman’s terms. A secured car loan requires you to provide your vehicle as security to get your finance approved. This means that your lender can legally repossess and sell your car if you don’t make your repayments. They register their financial interest in it on the Personal Properties Securities Register (PPSR) until you’ve fully repaid what you owe.
You can still drive your car and you are the legal owner of it while you’re making your repayments. But if you don’t make your repayments, the lender can legally repossess your vehicle and sell it to recover any amount you still owe on it.
Your car is called ‘collateral’ in financial jargon if it’s provided as security for vehicle finance.
The key difference between secured and unsecured loans is that unsecured finance doesn’t require you to put up any assets as security to your lender. Unsecured finance is therefore the opposite of secured finance.
If you take out an unsecured car loan, your lender won’t be able to repossess your vehicle if you fall behind in your repayments. They won’t have any financial interest recorded in the PPSR. That’s better for you, but more risky for the lender. That means unsecured car loans almost always attract higher interest rates than secured loans.
You still obviously have to make your repayments on an unsecured car finance. If you don’t, your lender will probably take other legal action against you even though they can’t repossess your vehicle. Not making your repayments will also damage your credit score, making it harder for you to borrow money in the future..
Vehicle finance can be secured or unsecured. Some lenders will offer both, but not all will offer unsecured car loans. The ones that do will charge higher interest rates. Most lenders prefer secured finance because it is lower risk.
If you take out secured car finance, you will get a lower interest rate than you will for unsecured finance because of that lower risk.
An unsecured car loan is often called a Personal Loan. When the car is for business purposes, an unsecured loan is called a Business Loan.
Secured and unsecured car finance both have their pros and cons. Let’s look at them each in turn. The option that’s best for you will depend on your individual situation.
Pros
Cons
There are few disadvantages of a secured car loan compared to a secured one.
Pros
There is only one real advantage of an unsecured car loan compared to a secured one.
Cons
Can you get out of a secured car loan early?
The only way to get out of secured vehicle finance early is to fully repay or to refinance your debt some other way if your lender agrees to that.
You could sell your car to get out of your loan early. But you should check to see if your lender charges any early repayment fees before you pay out your secured finance early.
Can you sell a vehicle that has money owing on a secured car loan?
Yes, but the lender will be entitled to take part of the sales proceeds to fully repay your debt.
Can buyers tell if there is money owing on my car if I want to sell it and I have a secured loan?
Yes, they can easily find out by doing a search of the vehicle’s registration number on the PPSR.
Can you get out of an unsecured car loan early?
The only way to get out of an unsecured finance early is to fully repay your debt, unless the lender agrees otherwise. You could sell the vehicle to do that. You should also check if your lender charges any early repayment fees before you pay out unsecured finance early, but most unsecured lenders do allow early payouts without penalties.
Can you sell a car that has money owing on an unsecured loan?
Yes, and you can use that money to repay your debt.
Can buyers tell if there is money owing on my car if I want to sell and I have an unsecured loan?
No, the lender will have no financial interest registered on the PPSR.
If you’re looking for finance for a new or used car, talk to our expert brokers at Auto Car Loans. We’ll take the time to understand your situation before exploring secured and unsecured vehicle finance options for you to find a great deal. We’ll also help you with your application.
Don’t use dealer-arranged finance or try to arrange your loan yourself. We arrange car finance for a living, and we can save you money, time and hassle. We work for our clients, not for lenders.
Get in touch with one of our expert finance brokers today by calling 1300 301 051 during business hours.