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Secured car loans
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.
What's in this guide?
- Secured car loan comparison 2021
- What is a secured car loan?
- How do secured car loans differ to unsecured loans?
- How to compare the different secured car loans available
- The benefits and drawbacks to consider
- Is there anything to avoid with secured car loans?
- Frequently asked questions about secured car loans
Secured car loan comparison 2021
What is a secured car loan?
A secured car loan is a way to finance a vehicle where you use your car as security. The car you buy 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.
Secured loans offer 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.
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. This is because the loan amount relates to the value of the vehicle. Unsecured car loans have no such restrictions, and you can use the loan amount however you choose.
- Vehicle requirements. Lenders offering secured car loans have guidelines for what type of vehicle you can purchase. The car may need 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. Always talk to your lender in the first instance if you can’t make a payment, they should be willing to come to an arrangement.
How to compare the different secured car loans available
There are a range of secured car loans available from various lenders. Finding the best-secured car loan depends on different factors; 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
The interest rate of a loan determines what your repayments are and differs significantly between lenders.
These can include establishment fees once you accept your loan and ongoing costs, such as loan service charges. Compare fees—as well as 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 seven years—that you can select from. Make sure the lender lets you repay the loan within a period that suits your budget.
- Minimum and maximum loan amount
A typical minimum loan amount is $3,000 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 off the loan earlier than expected. So, if you want to do this, look for a loan that won’t penalise you.
- 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.
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, e.g. 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 by reading the terms and conditions.
- Not choosing a loan that meets your needs.
It’s common 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. If the loan doesn’t meet your needs you may want to look at refinancing with another lender.
Frequently asked questions about secured car loans
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