There are two main options you could consider when it comes to using your car as security (or ‘collateral’) for a loan.
- A secured car loan where the car you’re purchasing is used to secure the loan
- A secured personal loan where you use a car you already own to secure a loan taken out for another purpose
Here’s a snapshot on how both situations could work.
Taking out a car loan using the vehicle you’re buying as security
If you’re taking out a loan to buy a new or relatively new car, you may have the option to secure the loan using the car you’re purchasing. The interest rate charged on your loan may be affected by whether your loan is secured or not. A secured car loan could potentially come with a lower interest rate than an unsecured car loan, depending on the lender and other factors.
For example, as at 2 October 2018 if you’re looking for a $20,000 car loan to be paid back over a three-year term in NSW, the lowest interest rate on Canstar’s comparison tables for an unsecured car loan is 5.99% with a comparison rate of 6.20%, whereas the lowest interest rate for a secured car loan – on those terms – is 4.74% with a comparison rate of 5.29%. These rates are subject to change, but give an idea of the difference that may apply between these two types of loan.
Also bear in mind that rates may differ depending on the provider and the exact loan terms. And remember, the interest rate charged on a loan isn’t the only thing to think about – features, fees and any terms and conditions that may apply are also important considerations..
If you’re considering taking out a secured car loan, we have a guide to taking out a car loan, along with articles detailing what you need to know when choosing a car loan, and how car loan pre-approval works.
Additionally, you can compare secured 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.
What about a personal loan secured against a car?
Some lenders may also let you take out a personal loan for another purpose and secure it against your car. You may find, however, that this is a less common type of loan and offered by fewer lenders. At the time of writing (15/10/2018) Canstar’s database shows 129 products available to those looking to take out a secured car loan, compared to 51 products available to those looking to take out a personal loan secured against a car (both examples based on a loan of $20,000 repaid over three years in NSW).
Similar to the example above, a personal loan secured against a car may come with a lower interest rate than an unsecured personal loan, but the rate charged could depend on other factors, too.
A comparison based on Canstar data as at 2 October 2018 shows that for a $20,000 loan to be paid back over a three-year term in NSW, the lowest interest rate for an unsecured personal loan is 5.99%-16.99% (exact rate will vary by applicant) with a comparison rate of 7.01%-18.08%, whereas the lowest interest rate for a car-secured personal loan is 5.25% with a comparison rate of 7.72%. But, as mentioned above, the interest rate on a loan isn’t everything – things like application and exit fees, as well as the ability to make extra repayments and access to a redraw facility are all things you may want consider when you’re shopping around for car loans.
If you’re considering a personal loan secured against your car, there are a number of other factors to bear in mind.
- The loan purposes: 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 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 risk involved: with this type of loan, if you cannot meet your repayments, you may risk losing the vehicle you have used as collateral.
As we’ve mentioned, you should always check the PDS of any product you’re looking at to check these details and whether the product is generally suitable for you.