What is an unsecured car loan?
An unsecured car loan is a less-common type of car loan in Australia, where you don’t need to offer the car, or any other asset – as security on your loan. Without this security in place, you will find that your options are more limited and you will likely need to pay a higher interest rate.
Most car loans are secured loans and the car is usually the asset used as security. Car loans are usually for large amounts, because cars are expensive, so it can be considered risky to lend money without security as a backup plan.
With a secured car loan, if you were to default on your loan, the lender could repossess your car. While you have a short window to fix the situation, the lender could sell your car to make up for their losses. This is why secured car loans usually come with lower interest rates, as the lenders have this security to fall back on.
Unsecured car loan fees
There are two types of unsecured car loan interest rates: fixed rate or variable rate. With a fixed rate, you will pay the same interest rate throughout the duration of your loan. This can be helpful to know exactly what your repayments will be each month, and how much you will pay back overall. On the other hand, with a variable rate, your interest rate may go up or down. You can save money if interest rates go down, but you may end up paying more if interest rates go up. This can make it more difficult to budget.
Pros and cons of unsecured car loans
If an unsecured car loan sounds like it’s the right fit for you, let’s discuss a few of the pros and cons so that you can make the most informed decision.
Pros of unsecured car loans
No asset as security: The car is less likely to be seized if you default on your loan, which you may want if buying the car as a gift for someone. However, this doesn’t mean there are no consequences of defaulting on your loan; your credit score will likely take a hit and you may face severe court proceedings which could result in strict mandates requiring you to repay the debt (plus the lender’s court costs) through various means (e.g. surrendering wages or forced sale of assets).
Lower interest rate than personal loan: Though your interest rate will be higher than a secured car loan, unsecured car loans still generally have lower interest rates than unsecured personal loans.
Borrowing flexibility: With an unsecured car loan, you can usually borrow as much as you’d like, as long as you can afford it. This means your loan could encompass the cost of your car, any other car-related fees (registration, insurance, etc).
Cons of unsecured car loans
Higher interest rate than secured car loans: As we mentioned, since unsecured car loans are riskier, you will likely see this reflected in your interest rate. You will likely pay more interest on your loan than if you took out a secured car loan.
Stricter eligibility criteria: Again, due to their higher risk, the eligibility criteria for unsecured car loans are usually much stricter and you will probably need a good credit score.
Potential legal action: If you default on your unsecured car loan, you won’t lose your car, but you could face legal action. Your information could be passed onto a debt collection agency, or they could file a civil lawsuit to get the money they’re owed. But this is only if you default on your loan.
How to compare unsecured car loans
When looking at your options, though they may be slim, there are still ways to compare and choose the most-suited unsecured car loan for you.
There are a few things you should pay attention to when comparing unsecured loans.
You should compare the interest rates available on the car loans, as well as the type of interest rate (fixed or variable). This can greatly influence how much you end up paying back in interest charges. Finding a competitive rate can be reliant on how good your credit score is, how much you are looking to borrow, and the lender.
In addition to interest rates, comparison rates should also be carefully considered. The comparison rate reflects the interest rate plus other fees and charges, so that you can get a better idea of how much you will end up paying back overall. Other fees and charges could include monthly fees, establishment fees and so on.
You should also consider how long the loan term is as this can affect how much you pay back in interest. Generally speaking, the longer the loan term, the smaller the monthly repayments. However, though the repayment amounts may be smaller, they add up over time and usually mean you are paying more in interest charges. If you want to save as much interest as you can, a short-term unsecured car loan may be suitable. If you cannot afford these monthly repayments, you may need a longer term agreement.
You should also consider whether you will be paying back your loan monthly or fortnightly, as this can affect your interest charged. If you pay monthly, this is equal to 12 months in repayments. But if you pay fortnightly, this comes in at 13 months in repayments (as long as the repayments are exactly half the monthly repayments – some lenders calculate this differently). So, paying fortnightly rather than monthly may see you pay off your loan faster and with less interest charged.