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Secured car finance in Australia: How it works
A secured car loan is a type of personal loan with a fixed term and often a fixed rate, where the car you buy acts as a guarantee. In other words, your car is the security for the car loan.
This is the most common way to finance a car in Australia and generally works out cheaper for the borrower compared to an unsecured loan.
This is because there's less risk for the lender. If you can’t repay a secured car loan, your lender has the right to reclaim the car to recoup its money.
Most car finance you’ll see advertised is for a secured car loan, but it’s not always the case. For example, analysis by Money.com.au found that several major lenders in Australia only offer unsecured car finance, including ANZ and ING.
Secured car loans work similarly to other finance options, but there are some key differences to understand.
Secured versus unsecured car loans
| Secured car loan | Unsecured car loan | |
|---|---|---|
Security required | The car being financed | None |
Loan term | 1-7 years | 1-7 years |
Interest rates | Starting from 6-7% | Starting from 7-8% |
Maximum loan amount | Usually up to $100,000 | Usually up to $60,000 |
Loan purpose | Vehicle purchase only typically | Any purpose (could also cover related costs like insurance) |
Type of interest rate | Usually fixed | Fixed or variable |
Fees | Generally lower | Generally higher |
Age of vehicles eligible | Up to 12 years old | Any age |
Balloon payment option? | Yes | Yes |
Comprehensive car insurance required | Yes, generally | No |
Are secured car loans better?
Broadly speaking, if you’re buying a car, a secured car loan is generally going to work out cheaper than using unsecured finance.
That’s because secured car loan interest rates are usually lower.
Analysis by Money.com.au of the products on our database found secured loans have an average (median) interest rate of 12.22% p.a., whereas for unsecured personal loans the equivalent figure is 15.42% p.a.
Put simply, the security (the car) removes risk for the lender. So they chip a bit off the interest rate. This is often also reflected in lower fees on secured car loans.
It may also be easier to be approved for a secured car loan due to the increased protection for the lender.
You get flexibility, too, as it's possible to get a secured car loan for most used as well as new cars.
Below is an example from Bank of Melbourne of the different interest rates on offer depending on whether the loan is secured or unsecured.
What are the disadvantages of a secured car loan?
Phil Collard, Money.com.au's Car & Personal Loans Expert
“With a secured car loan, the lender maintains an interest in your vehicle during the finance term. This means that in the unlikely event you can't repay the loan, the car could be repossessed. There can also be more paperwork with a secured loan. The lender will want details about the car before it approves the loan, and proof that it will be covered by comprehensive car insurance. But these extra steps reduce risk for the lender and in return the borrower typically saves money.”
Phil Collard, Money.com.au's Car & Personal Loans Expert
What car can I buy with a secured car loan?
Generally, you can finance new and used cars up to 12 years old with a secured car loan.
That said, some lenders have a lower maximum age than this. Some also charge higher interest rates the older the car is. The car can usually either be purchased from a dealer or through a private sale.
It’s possible to finance a commercial vehicle using a secured business car loan.
Even other vehicle types such as caravans and motorcycles can be eligible for secured finance.
Our analysis of car loan requests shows that 37.16% were for new cars, 16.17% for cars 1 to 3 years old, and 10.68% for cars 4 to 5 years old. 20.67% were for cars 6 to 10 years old, with the remaining requests for cars 10 years or older.
Common restrictions on secured car loans
Grey imports
Most lenders will not offer secured car finance on “grey imports” (Nissan Skylines are a common example). These are vehicles that were imported as a used vehicle, and were not originally sold by the manufacturer in Australia.
Negative PPSR reports
Vehicles with negative reports on the Personal Property Securities Register (PPSR) are also typically not eligible for a secured car loan. This may include the vehicle being reported stolen, written off, or having an incorrect odometer reading.
You can generally borrow a maximum of 100% of the car's value with a secured car loan. Your loan cannot be used to finance related costs.
Do I qualify for a secured car loan?
Your eligibility for a secured car loan will depend on how much you wish to borrow, the age and type of vehicle you’re buying, and your financial situation.
When it comes to the last point, lenders generally look for:
- A clean credit history (or in other words a high credit score)
- Borrowers who have been in regular, stable employment for at least two years
- Someone who can demonstrate financial responsibility (they’ll look at your bank statements for this).
BUT secured car loans can also be options for people who can’t tick all of these boxes.
Like people with bad credit (through a bad credit car loan).
Or self employed people who don’t have a regular income (through what’s called a ‘low doc car loan’).
Remember, you can apply for car loan pre-approval to check how much you are eligible to borrow from a lender before you go car shopping.
How to find the best secured car loan deal
1
Look for the lowest rate
Secured car loan rates tend to be cheaper than other forms of finance, but the rates available can still vary massively between lenders. Shop around.
2
Minimise fees
Secured car loans can include up-front and ongoing fees. These will be reflected in the comparison rate on the finance.
3
Choose the shortest loan term you can afford
The same secured car loan repaid over four years will cost you less overall than if you repaid it in five years, but the regular repayments will be higher.
4
Find flexible features
Ideally look for a secured car loan with the option to make extra repayments and repay it early without penalty. A redraw facility will mean you can access extra money you've repaid if you need it.
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