What types of car loans are there?

Buying a car with finance? You’ll need to decide if you want it to be a secured car loan or unsecured car loan. 

Borrowing money to buy a car is a managed risk – for both you and the lender. That’s why lenders offer different two basic types of loans – a secured car loan and an unsecured car loan. Which one you choose can affect how much you’ll be paying and the interest rate you’ll be charged. Let’s take a closer look at the type of loan that might be right for you.

What is a secured car loan?
With a secured car loan, you put your money where your motor vehicle is. That is, the loan is secured against the car you’re buying. So if you fail to make your repayments, the lender can sell your car to recoup its money. It’s a lender's way of knowing they won’t lose out if things go south – they have a security blanket.

But they’re usually only available for newer vehicle models since they’re more valuable as an asset – typically for a car that’s less than 7 years old with a market value of at least $10,000.

Given that the loan is secured by the value of your vehicle, your lender will ask you to confirm the value of the asset and ensure that its value is protected. You will be asked to do this by:

  • Informing your lender of your new vehicles chassis number, vehicle identification number (VIN), registration number, model & make, year, and colour
  • Providing the lender with a copy of your car registration papers
  • Getting a vehicle inspection (if through a private sale)

What you get
Having security (also known as collateral) means that the lender can offer a lower interest rate for the loan. This can help you save on your repayments, borrow a greater amount or even extend the repayment period longer.

A secured car loan generally comes with a fixed interest rate, meaning you have the certainty of knowing how much your repayments will be over the life of the loan.

What is an unsecured car loan?
An unsecured car loan is all about trust (and good judgement). There’s no asset put up as collateral, so a lender will decide whether or not to give you a loan based solely on how creditworthy you are. If you fail to make repayments or defaults on your loan, the lender must sue you to get back what you owe them.

They’re riskier for the lender, so they usually come with a higher interest rate. You’ll also likely face stricter eligibility requirements including a good credit score history.If you’re looking to borrow a smaller amount for a new or old car and know that you’re able to make the repayments, then an unsecured loan might be for you. It might be your only option if you’re buying an older car or one that’s worth less than the value of the loan.

What you get
Unsecured loans generally have shorter loan terms (up to 5 years) and a lower maximum loan amount (up to $50,000). But on the upside, there are fewer restrictions on how you spend the loan funds. So you may buy a vehicle of your choice, regardless of age. You also have the flexibility to use your loan to pay for other costs associated with buying a car, including:

  • Insurance
  • Registration
  • Tyres
  • Aftermarket upgrades
  • Roadside assistance
  • A pre-paid maintenance agreement

But what about fixed and variable-rate car loans?
When it comes to car loan repayments, you might also have a choice – either a fixed (set) or variable (changing) interest rate.

When it varies
With a variable-rate car loan, the interest rate can change up or down across the life of the loan. They bob with the tide, so when rates go up so will your repayments, and when rates go down, your repayments will too. 

But no one has a crystal ball. So if you’re considering a variable-rate car loan, factor a buffer into your budget, so you don’t feel the pinch of higher repayments if rates do go up.

Fix it
When you take out a fixed-rate car loan, the interest rate is locked in for the term of the loan. They often have higher interest rates than what’s been offered for variable loans. But they give you certainty and help you manage your money because your repayments will stay the same. And if the market does shoot up, you’re protected.

But remember, you may have less flexibility and freedom to make early repayments with a fixed rate, depending on your lender. Although many online car loan providers offer no early repayment fees regardless of whether your loan is fixed or variable. Make sure you check with your lender before you lock it in.

Pros and cons of each loan type:

Why choose a secured car loan?
+  Lower rates
+  Good if you want to buy a new or used car under 7 years old
+  Borrowing potential increased
+  Longer terms available
-  Can take longer to approve
-  More restrictions on what you can buy
-  You can’t use it for other costs (aftermarket upgrades, repairs etc)

Why choose an unsecured car loan?
+  Greater freedom for what car you can buy
+  You can use it for other costs (insurance, registration, etc)
+  Quick application process
-  Higher rates
-  Less borrowing potential
-  Shorter loan terms

Why choose a variable-rate car loan?

+  Usually more flexibility to repay your loan early
+  You’ll benefit from lower repayments if interest rates go down
+  Rates are competitive
-  A rate increase will result in higher repayments
-  Budgeting is harder

Why choose a fixed-rate car loan?
+  Know what your repayments will be for the life of the loan
+  Easier to budget 
-  More likely to have early repayment fees
-  May be less flexible depending on the provider

Choose wisely

When it comes to choosing which loan type is right for you, ask yourself:

  • What’s the interest rate like? Before choosing your loan type, you should compare car loan rates to find the lowest possible rate available
  • Do you prefer a fixed or variable rate?
  • Can you realistically make repayments on time?
  • What is the length of the loan?

Buying a car is a big financial commitment, and it’s important to not only factor in the price of the vehicle being purchased but also the fees that come with a car loan. 

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