Secured car loans are the norm for the vast majority of vehicles purchased with finance, and in most cases, they are the better deal for a customer.
Lower interest rates, flexible repayment terms, and larger potential loan approvals are among the benefits available to you. Allowing you to buy your dream car sooner.
However, there are risks involved that you should be aware of. Terms like default, repossession, and PPSR are all things you should understand before entering a secured car loan.
In this article, we cover this and much more!
In This Post:
What Is a Secured Car Loan
A secured car loan is a category of financing where the vehicle you’re purchasing is the collateral.
This means that if you can’t repay the loan the lender has the legal right to repossess the car to recover their money.
Sounds serious, right? But, this additional safety net for the lender allows them to offer lower interest rates when compared to unsecured loans.
The additional security lowers the risk of the loan for the lender.
How a Secured Car Loan Differs From Unsecured Loans
An unsecured loan has no collateral attached and functions just as a regular personal loan.
So if you do not repay your loan the lender cannot take possession of the vehicle quite as easily.
It is still possible but will require an expensive legal process (which you will end up paying for).
While it may sound better on the surface to keep your car distanced from the loan you used to buy it. However, the trade-off is the loan will have a higher interest rate and approval may be more difficult.
The risk is higher for the lender which means higher costs and stricter requirements.
How Secured Car Loans Work in Australia
Your Car as Collateral
When you take out a secured car loan, your lender registers the vehicle as security for the loan.
This ensures they have a claim to the car until the debt is fully paid off. Once you’ve met your repayment obligations, the car is entirely yours, free of any encumbrances, and this registration is removed.
Where is Loan Security Registered in Australia?
In Australia, lenders register the car’s security interest on the Personal Property Securities Register (PPSR).
This is a national database that keeps track of assets used as collateral, ensuring transparency and protecting both lenders and buyers.
So if you try and sell your car before paying off your loan a potential buyer will be able to see there is an encumbrance on the vehicle and may require proof from your lender that this will be removed prior to transferring ownership.
What Happens If You Can’t Repay an Unsecured Loan
If repayments become unmanageable, the lender may repossess the vehicle.
While this sounds like a drastic step, your vehicle is a depreciating asset and it is in your lender’s best interest to recover as much of that value as possible if you are not repaying your loan.
If you are falling behind on your repayments you should speak to your lender as soon as possible. Many will offer flexible solutions like repayment holidays or refinances if you are experiencing financial hardship.
This may allow you to keep your vehicle while you get back on track.
Benefits of Secured Car Loans
Lower Interest Rates
The biggest benefit of a secured car loan is you will often be eligible for a lower interest rate.
Vehicles are relatively easy to sell quickly as long as they are in good condition. This reduces the risk of significant loss and allows them to offer cheaper loans.
This is the best possible option for most people and the most common type of car loan.
Boost Your Borrowing Power
Having collateral can increase your loan eligibility, allowing you to afford a better car.
Not all lenders will offer unsecured loans big enough to buy the car you want. Whereas it is very common for secured auto loans to go upwards of $50,000 – as long as you can afford the repayments.
Flexible Loan Terms That Fit Your Budget
Secured car loans often come with longer loan terms which can offer more flexibility to achieve your desired repayment size.
Whether you prefer short-term repayments to pay off the debt fast, or longer terms to reduce monthly costs, there is more flexibility to suit your budget.
Risks of Secured Car Loans
Repossession of Vehicle in Case of Default
The biggest risk is losing the car if you default on payments.
This highlights the importance of borrowing within your means and having a solid repayment plan.
Speak to our brokers today to get a realistic assessment of what you can afford the loan options available to you.
Additional Consequences of Defaulting
Missing repayments can affect your credit score. If you default there will be a mark on your credit file for up to five years which may affect your eligibility for future credit.
While there are car loans for those with bad credit, they will be far more expensive even though it would be a secured car loan.
What If the Car Value Doesn’t Cover the Loan
Some cars may depreciate rapidly. If there is any damage to the vehicle then it will be worth even less than what you may expect.
After a car is repossessed the lender will send it to auction which is also unlikely to get you the best sale price possible.
Combine all of these factors and you may be left with no car and still have to repay a leftover balance on the loan.
This takes some people by surprise but it is your responsibility and you are legally liable to repay in full.
Eligibility for a Secured Car Loan
What Lenders Look For in Borrowers
Lenders evaluate a range of factors including:
- Your credit history
- Employment tenure and income stability
- Repayment capacity
- Use of short-term lending products like wage advance and BNPL
Each of these factors (and more) will determine what lenders may offer you a secured car loan.
However, even if you have a poor credit history or are on Centrelink there will still be lenders that may approve a loan.
So get in touch with our brokers today to discuss your specific circumstances.
We discuss car loan eligibility in much more detail here. Below is a quick summary of key factors consistent across lenders.
Credit Score
Your credit score provides a quick snapshot of your history of managing debt.
A higher score signals reliability, making lenders more inclined to approve your loan on favorable terms.
While a lower credit score will exclude you from some lenders, others will lend to very low credit scores if there are other factors that indicate you are a good credit risk – despite past troubles.
Income Requirements and Stability Considerations
Demonstrating steady and consistent income is crucial so that the lender can assess if you can afford a loan.
Lenders are legally obligated to assess whether you can handle your monthly loan repayments without the risk of substantial financial hardship.
How to Choose the Right Secured Car Loan
While you want to shop around, you may not be eligible for the best rates on the market depending on your circumstances.
If you do not have the time or inclination to shop around, we have access to over 40 lenders and have detailed industry knowledge so we can match you with the right option for you in no time!
Complete the inquiry form below in two minutes and we’ll be in touch.
Alternatives to Secured Car Loans
Unsecured Car Loans
An unsecured car loan is rarely a better option.
However, if the value of the car is low and you may need to sell the vehicle in the near future then an unsecured car loan will allow you to do so without the involvement of a lender.
Personal Loans
Similar to the above, you are likely to pay a higher interest rate on this type of loan.
You would only select this if you need a unique level of flexibility.
Conclusion
For many Aussies, secured car loans provide an affordable, reliable way to finance a vehicle.
The interest rates are lower, payment terms more flexible, and there are clear guidelines for how a lender must treat the security.
A secured car is the best choice for the majority of customers we deal with. So if you’re ready to get started then click below to start comparing lenders and our brokers will get to work for you.
