Use your car as security and benefit from lower interest rates.
Have you been thinking about financing a new car but are concerned about the cost? Whether you’re purchasing a new or used vehicle, you may be able to use it as a guarantee to take advantage of a lower interest rate. Find out what you need to know about secured car loans in this guide.
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Secured car loan comparison 2020
How does a secured car loan work?
A secured car loan is a way to finance a vehicle where you use your car as security. The car you’re purchasing needs to be in good condition, so lenders usually require the vehicle to be new, but you can find secured car loans for used vehicles. You can also use some secured car loans to refinance an existing secured loan from another bank.
Secured loans can offer you a lower rate of interest because it is less of a risk to the lender. If you default on the loan, the lender can repossess the car you purchase. Secured car loans offer low-interest rates that can be fixed or variable.
How do secured car loans differ to unsecured loans?
There are several standard differences between these two types of loan:
- Loan amount flexibility. With a secured loan, it restricts how you can use your funds. For example, you may not be able to borrow more to cover the rego, insurance or other costs, which is because the loan amount relates to the value of the vehicle. Unsecured personal loans have no such restrictions, and you can use the loan amount however you choose.
- Vehicle requirements. Lenders offering secured car loans have guidelines as to what vehicle you can purchase, which may be that the car needs to be below a specific age or you cannot buy particular types of vehicle. However, if you opt for an unsecured loan, you can purchase whatever kind of car you like.
- Interest rates. Rates for secured car loans are usually more competitive than unsecured loans.
- What happens if you default? When you default on a secured car loan, the lender can sell the vehicle to recoup its losses. If you default on an unsecured loan, the lender has no right to your car.
Fixed vs variable rate secured car loans
Secured car loans can come with either fixed or variable interest rates, and it’s essential to select an interest rate that best meets your needs. Let’s look at the difference between them:
|Fixed interest rate||Variable interest rate|
How to compare the different secured car loans available
There is a range of secured car loans available from various lenders. Finding the best-secured car loan depends on, for example, your financial situation and the length of the loan you require, but there are some other factors which you can use to determine the merit of the loan.
- Interest rate and comparison rate
The interest rate of a loan determines what your repayments are and differs significantly between lenders. The comparison rate incorporates the total cost of the loan, so make sure you compare this before applying.
These can include establishment fees once you accept your loan and ongoing costs such as loan service charges. Compare fees in addition to the interest rate and loan features to make sure you get a good deal.
- Loan term
Lenders set specific loan terms (usually between one and five for fixed-rate loans and one and seven years for variable rate loans) that you can select from. Make sure the lender lets you repay the loan in a period that suits your budget.
- Minimum and maximum loan amount
A typical minimum loan amount is $1,000 while the maximum amount varies between lenders. Some lenders don’t have a maximum borrowing amount and consider it on a case-by-case basis. Bear this in mind depending on what car you wish to buy.
- Additional repayments
Some lenders let you make extra repayments to pay off the loan sooner. If you think you can put more money towards the loan, then ensure you include this feature in your comparison. Bear in mind that some lenders charge fees if you pay out the loan earlier than expected, so if you wish to do this seek a loan without a penalty.
- Other features
Loans come with various features to help you manage it better. Some lenders offer discounted insurance products with its loan, and others provide vehicle finding services.
Not sure if a secured car loan is right for you?
There are many different types of loans, and some may be better for your situation than others. Compare the fixed rate personal loan alternatives below.
How much can I borrow?
With a secured car loan, the amount the lender offers is dependent on the value of the vehicle you’re purchasing. If you have not yet found the car you want to buy, the bank or lender may offer you pre-approval for a specific amount, so you know how much you can spend on a vehicle. When you arrange to buy the car, the lender pays the car dealer/private seller directly.
Whether or not you can include additional upfront costs such as insurance and registration in the loan amount depends on the lender and how much you receive approval for.
The benefits and drawbacks to consider
- Competitive interest rate. Secured loans come with lower interest rates than unsecured loans, which helps to keep your repayments manageable.
- The vehicle doesn’t have to be brand new. Some lenders let you use a used vehicle as a guarantee for a loan, and cars up to 12 years of age or older can be eligible. The age of eligible vehicles may vary with lenders, eg it is up to 20 years of age with Kiwibank.
- A restricted loan amount. As the loan is secured, you can typically only use the loan amount to purchase the vehicle (and not for unrelated costs). You may find some lenders willing to extend this loan amount to buy car insurance or something similar.
- Risking your vehicle. Although using your car as security lowers your repayments, it also means that if you default on your loan, you lose your car. Make sure you only take on a loan you can afford and keep on top of the repayments.
Is there anything to avoid with secured car loans?
- Over-estimating your repayments.
Although using your new car as security has its benefits, it also means the lender can take it away if you default on your loan. Be sure only to take out a loan that is manageable with repayments you can meet.
- Not being aware of fees.
If you do not familiarise yourself with the fees associated with a secured car loan, you may end up paying more than you thought. Some lenders have lower fixed interest rates, but then have higher monthly fees, which mean you end up paying more anyway. Make sure you’re aware of all aspects of the loan.
- Not choosing a loan that meets your needs.
It’s prevalent for people to choose a loan that they regret in a few years. You could be paying off this loan for a while, so make sure you take into account possible changes in your financial circumstances. You may receive a promotion and want to increase your repayments to pay off your loan sooner, but your lender may not allow this. Make sure you check all the limits of the loan and its flexibility.
Questions users frequently ask about secured car loans
How do I apply for a secured car loan?
Applying for a secured car loan differs between lenders. Many lenders let you apply online, with some processing your application and sending a response within minutes. You can also apply over the phone or by visiting lenders who have branches. For details on specific lenders, take a look at their websites.
What is the length of a secured car loan?
The length of a loan differs between lenders, but a typical option is from between one and seven years. If the interest rate is fixed, the lender may only offer a loan term up to five years.
What are the minimum and maximum loan amounts for a secured car loan?
The loan amount differs between lenders, with some offering loans for as low as $1,000 and maximums reaching as much as $100,000 or more, eg UDC offers a car loan of $150,000. Some lenders have no minimum or maximum amount.
What are the other finance options for car loans?
There are several options for you to finance your car purchase. You can choose from a range of secured and unsecured personal loans or secured and unsecured car loans. Some lenders also have general credit options and loans which may be suitable for your financial situation.