Usually, interest rates for unsecured personal loans are higher than secured loans, as the lender carries the risk you’re unable to pay back the loan. Therefore, you may be considering whether it’s worthwhile offering an asset (in this case, your car) to secure your new personal loan, to take advantage of the potentially lower interest rates and fees.
Let’s explore the two main options you could consider when it comes to getting a secured loan using your car as collateral:
- A secured car loan to buy the car
- A secured personal loan for another purchase
Option 1: a secured car loan to buy the car
If you’re taking out a loan to buy a brand-new or relatively new second-hand car, you may have the option to secure the loan using the car you’re purchasing. Using the car to secure the loan provides the lender with a safety net they can use to get their money back in the event you can’t repay the loan in time. In other words, if you were unable to pay back a secured car loan, your lender would be able to sell the car to recover its money.
A secured car loan could potentially come with a lower interest rate and fees than an unsecured personal loan used to buy a car, depending on the lender and other factors. For example, on Canstar’s database at the time of publication, the average interest rate for a loan of $30,000 over five years was:
- Unsecured personal loan: 10.85%
- New car secured car loan: 6.75%.
- Used car secured car loan: 7.29%.
Keep in mind that depending on the lender, you may be required to pay a deposit to secure the loan. It’s also important to consider the fees you will also be paying through the life of the loan (including fees you may incur should you pay the loan off early).
Compare Secure Car Loans with Canstar
The table below displays a snapshot of 5-Star and 4-Star secured car loans on Canstar’s database with links to providers’ websites, sorted by Star Rating, then provider name (alphabetically). The loans displayed are based on a loan of $20,000 to be repaid over three years in NSW. Check upfront with your provider to confirm the details of a particular loan product, and whether it meets your needs, before deciding to commit to it. *Read the Comparison Rate Warning.
Option 2: a secured personal loan for another purchase
Personal loans can be used for many reasons, such as to buy a car, pay for a holiday, renovate your home, or even to consolidate your debts. Using an asset like your car as security could help you access a cheaper loan, compared to an unsecured loan. The key to this option working is that your car’s value will most likely need to be greater than the amount you want to borrow on your loan.
It’s important to note that not all lenders will let you take out a personal loan for another purpose and secure it against your car. Canstar’s database suggests borrowers may be able to find a broader range of options for a secured car loan than for a personal loan secured against an existing asset. Consider shopping around across different lenders regardless of which type of loan you decide on.
If you’re considering getting a secured loan against your car, there are a number of other factors to bear in mind.
- The loan purpose: this type of loan may not be available for as wide a range of purposes as an unsecured loan.
- Vehicle eligibility: vehicles that are above a certain age or valued below a certain amount may not be eligible to be used as security, for example.
- The loan amount: because the loan is secured by a car, the loan amount will generally be tied to the vehicle’s value. The car may need to be owned outright (no existing finance owing) and comprehensively insured.
- The risk involved: with this type of loan, as with a secured car loan, if you cannot meet your repayments you may risk losing the vehicle you have used as collateral.
You should always check the lender’s terms and conditions for any product you’re looking at to check these details and whether the product is generally suitable for you.
What other assets can be used to secure a new personal loan?
Some lenders might allow you to take out a secured loan against another high-value asset you own, like a motorbike, caravan, investment accounts or even your home. Each form of security can carry its own set of advantages and risks, so it’s important to consider your own circumstances before agreeing to provide any particular form of collateral.
What else should you consider?
It’s important to remember that when an asset is secured against a loan, the lender has the right to repossess that asset to recover their costs in the event you fail to meet your repayments. So, make sure you’re comfortably able to afford taking out finance before choosing this option.
Additionally, if you take out a new car loan using that car as security and decide to sell the car while finance is owing, you may need to obtain your lender’s permission (or at least to confirm your options with them) before you’re able to go ahead with the sale.
If your reason for considering using your car as collateral to secure a personal loan is to improve your application, you could also consider asking someone you trust to act as a guarantor for the loan, although bear in mind this option can also carry some risk for that person.
→ Buying a new car? Compare car insurance with Canstar
Original reporting: James Hurwood