Your complete guide to secured car loans

Looking for a car loan with less risk and lower rates with the option for larger loan amounts?

Then a secured car loan may well have your name on it.

What is a secured car loan?

Think of it as an asset-based loan where your financial assets are put up as collateral to secure your loan amount. If you have a car, a house, fancy art, collectible jewelry or anything of significant value then you can offer these to a lender in order to secure funds. You can even use the car you are about to purchase as collateral (security), if it meets the lenders age and value specifications.

The lender can then use these assets for payment should you be unable to make your repayments. But the good news is a lender sees your secured loan as being less of a risk and, in turn, offers a lower interest rate.

Secured loans are less risky to a lender as most applicants will ensure they make their repayments when their assets are on the line.

Who offers secured car loans?

There are a wide range of providers of secure car loans - from traditional banks to newer fintechs.  Do your research on banks, credit unions and online loan companies who will each set their own eligibility requirements and interest rates based on your credit history and assets.

Choose a secured car loan provider with a solid reputation for customer service and good customer service rating and reviews.  Keep in mind that it is best not to make multiple applications as this can negatively impact your credit score.

Why choose a secured car loan?

You’re more likely to choose a secure car loan if you have some assets, you want to borrow a larger amount (or have a longer payback period) and are looking for a lower interest rate. You may also be planning on purchasing a new car, and you’re happy to include the car itself as security on the loan. 

Simply put, a secured loan is easier on the wallet with less fees and charges. Nice one.

If you have less-than-stellar or simply bad credit then you’re also more likely to be approved for a secured loan over an unsecured one, as lenders face less risk when you bring collateral to the table.

Also, if your work is erratic, you work part time or casual or are self-employed then a secured personal loan is a workable option for you. Having secured assets means your employment need not be as secure.

Many applicants without full-time jobs find it hard to get an unsecured car loan but easier to get a secured one. 

What kind of asset is eligible to secure my personal loan?

Cars, precious metals, stocks, insurance policies, even cash can be used to secure a loan.

As a general rule, you’ll need to have at least one of the following assets.

• Real estate with earned financial equity, this may be residential or commercial or it could be land.
• Stocks, funds or bonds.
  
• Cars, boats, trucks, motorbikes, even farm equipment. This can include the car you are purchasing if it meets lenders requirements. 
  
• Bank accounts with cash – term deposits or similar.
  
• Precious metals, antique collectibles, jewelry, artwork, other items of larger value.
  

Some lenders will stipulate that the asset must have the same value as the loan amount you’re applying for, others will only accept assets that are easily sold for cash should you default.

Is anything off limits?

If you’re using a secured loan to purchase a car then many lenders will stipulate the maximum age that car can be. This is to ensure it retains the value required should you default on your loan. 

Of course, it’s best not to take a car loan out on behalf of a friend or relative. It will be your responsibility to pay back the loan should your relationship sour or they fall on hard times. Ouch.

Is a secured car loan a good idea?

The main difference between a secured and unsecured loan is the collateral.

An unsecured loan doesn’t require any assets, so if you’re late in payments then the lender can’t seize your home, car, jewelry and the like.

However, you’re likely to pay more interest on an unsecured car loan. So, if you’re on a tight budget, then securing your loan makes sense.

Secured loans are easier to get approval for, even with bad credit. You may also be able to obtain a larger loan amount based on the value of your asset.

The need to know basics

Do be prepared for a longer application process as the lender will need to value your collateral, which may take some time and will take more paperwork. There could also be restrictions on what you can spend the loan money on.

If you default on the loan then you could lose your assets you used as collateral and they may be taken quickly to be sold off to a buyer. Should your asset sale not cover the outstanding debt then you’ll also be responsible for the outstanding amount and that will directly impact your credit rating.

So read the fine print.

If you’re applying for a secured car loan then there may be restrictions on the car you can purchase. Some lenders only allow the car to be a maximum of 5 years old at the time of purchase, so that the assets loan to value ratio would cover the debt should you default.

What can you use a secured car loan for?

You can use your secured car loan to totally fulfil your four wheel dreams. Check with the lender what restrictions they have, as some providers are tighter than others.

How much can you borrow?

Depending on the provider, you can borrow as much as $100k to be paid back over 7 years. Good lenders will ensure you borrow an appropriate amount based on your credit history, your financial situation and lifestyle.

All the fees and charges

The good news is secured car loans traditionally offer lower interest rates.

If you have a higher credit score then talk to the provider about reducing the interest rate further.

Remember to check more than just the interest rate. Are there any ongoing fees? How long is the repayment option? Are there any exit fees to paying the loan out early?

What about my credit

Credit is not a dirty word. Secured personal loans not only offer an attractive option for those with some credit stains, it also offers the opportunity to repair your credit rating so long as you make your repayments on time.

However, if you default on your secured car loan then everything changes. Your assets will be seized to cover your outstanding debt. If you are facing financial difficulty then it’s better to discuss a manageable repayment scheme with your provider than risk default. We all know life can change quickly.

If you’re not sure of your credit rating then you can check your credit report via a registered agency such as Equifax, CheckYourCredit and Experian.

What will I need to be approved?

Two words. Paper work. Make sure you have it or access to it as secured personal loans are a longer process.

You’ll need value statements for the assets you are securing, though providers will also do their own assessments. Add bank statements, employment history, credit card statements, lease or proof of property ownership and more.

If you’re self-employed you’ll need the last two years of your business and personal tax returns (so have your accountant on speed dial). You may also have to show profit and loss statements, bank statements, credit card statements, your lease if you rent, an ATO Notice of Assessment for two years, ABN and the like.

Identification documents are a given so get your passport, licence and proof of address together.

If, after all of this, you don’t qualify for a secured car loan then consider a low doc loan as another option. You’ll need less documentation but interest rates will be higher. However you may be able to negotiate more flexible repayment options.