Unsecured car loans
Obtain the funds you need without restrictions on the type of car you can purchase with an unsecured car loan.
If you want to purchase a second-hand car; wish to use the loan amount to pay for something in addition to your vehicle, or you don’t want the risk of attaching your vehicle as security to a loan, an unsecured car loan may be an option. An unsecured loan lets you borrow funds for a car of your choosing, as well as any other legitimate purpose, without attaching your vehicle as security. Find out more about this loan and whether it’s right for you by reading our guide below.
Is an unsecured car loan right for me?
An unsecured car loan is an option to consider in a few situations:
- You’re purchasing an older or second-hand car. Secured car loans come with restrictions regarding the type of vehicle you can use as security. Limitations typically include a maximum age limit, which can extend up to 12 years with some lenders, longer with others (Kiwibank), that the car is in good condition and is of a specific value. If your vehicle does not meet these criteria, you may want to consider an unsecured car loan. However, bear in mind secured used car loans are available.
- You want to borrow funds for two or more purposes. If you’re borrowing money to buy a car as well as consolidate debt, or to purchase your rego or even to get the vehicle modified, an unsecured car loan may work better for you. With a secured car loan, you can typically only borrow the value of the car, so the lender is sure it can recoup its cost if you default on the loan.
- You don’t want to use your car as security for the loan. Using your vehicle as a guarantee for a loan can give you access to lower interest rates and also help you to receive approval. However, if you don’t want to risk losing your vehicle if you default on the loan, you may want to opt for an unsecured loan.
Unsecured vs secured car loans: The benefits and drawbacks
|Unsecured car loans|
|Secured car loans|
How does an unsecured car loan work?
An unsecured car loan is one which allows you to purchase a vehicle without needing to attach the car as security. Because the lender doesn’t use the car as security, there aren’t restrictions on what type of vehicle you can buy, such as it being under a certain age or of a specific value. You can also borrow more to take out insurance or cover additional vehicle costs.
An unsecured car loan is a higher risk for the lender because there is no guarantee attached, so you should expect a higher interest rate than you would with a secured car loan. You may also be subject to stricter eligibility criteria regarding your financial stability.
How to take out an unsecured loan to buy a car
The borrowing process may differ slightly between lenders, but typically you need to take the following steps when financing your vehicle with an unsecured loan:
- Find your vehicle. It’s good to get an idea of what kind of car you want to buy and how much it costs before you start looking for a loan. Even if you don’t settle on a specific vehicle, get a ballpark figure so you can start comparing your loan options.
- Work out what repayments you can afford. How much can you comfortably repay each month? Remember to take into account the on-road costs for your new vehicle.
- Compare unsecured car loans. Now it’s time to start your comparison. Look at how competitive the interest rate is and check for upfront and ongoing fees. The comparison rate gives you a good idea of the overall cost as it includes interest plus fees. Finally, check for features that are important to you such as repayment flexibility or the ability to repay the loan early. See our “how to compare” section below for more information.
- Check that you are eligible. Lenders have set minimum eligibility criteria that you need to meet to receive approval for a loan, which typically includes a minimum age requirement; minimum income; credit history conditions and employment requirements. The minimum eligibility criteria for loans are listed at the bottom of every finder.com/nz review. If you are unsure if you meet any of the set criteria, contact the lender directly.
- Apply for the loan. Once you’re sure you meet the minimum requirements you can click “Go to Site” to apply online. Have your ID, financial and employment documents on hand to complete the application.
- Organise your funds with the lender. Lenders disperse funds in different ways. It may prefer to pay the car seller directly or send the funds to your bank account. Discuss the best way to receive the funds with your lender.
How can I compare unsecured car loans?
Here is what to look at when comparing your options:
- Interest rate. The interest rate is the essential thing to take into account. Typically, the lower the rate, the lower the repayments are. The first thing you should do is to compare the interest rate different lenders offer by checking the “interest rate” column in our comparison table above.
- Comparison rate. The comparison rate reflects the actual cost of the loan because it takes into account the fees as well as the interest rate.
- Fees. Look for up-front costs such as application or establishment fees, plus ongoing charges such as monthly or annual fees. You may also find fees for additional payments or repaying the loan early which can make it restrictive, so check if these apply.
- Repayment flexibility. Most lenders let you choose between weekly, fortnightly or monthly repayments. Check whether you can make additional repayments and repay the loan early without penalty.
- Redraw facility. Redraw facilities allow you to withdraw any extra repayments you put into your car loan, which is particularly useful in emergencies when you may need the cash, but check if a fee or limit applies.
Summary: What to remember about unsecured car loans
- Interest rates are higher than secured car loans.
- There are no restrictions on the car you can purchase.
- There may be more stringent eligibility criteria.
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