Compare Unsecured Car Loans | Savings.com.au
What is an unsecured car loan?
An unsecured car loan is a less common type of car loan in Australia that doesn’t require you to offer the car or any other asset as collateral for your loan. Without this security, you will find that your options are more limited and you will likely have to pay a higher interest rate.
Most car loans are secured loans and the car is usually the asset used as collateral. Car loans are usually for large amounts as cars are expensive so lending money without collateral as a backup plan can be considered risky.
With a secured car loan, the lender could take your car back if you default on your loan. While you have a short window of opportunity to rectify the situation, the lender could sell your car to recoup its losses. For this reason, secured car loans usually have lower interest rates since the lenders can draw on this security.
Unsecured car loan fees
There are two types of unsecured car loan interest rates: fixed rate or adjustable rate. With a fixed interest rate, you pay the same interest rate throughout the life of your loan. This can be useful for knowing exactly what your monthly repayments will be and how much you will repay in total. On the other hand, with a floating rate, your interest rate can go up or down. You can save money when interest rates go down, but you might end up paying more when interest rates go up. This can make budgeting difficult.
Pros and cons of unsecured car loans
If an unsecured car loan is right for you, let’s discuss some pros and cons so you can make the most informed decision.
Benefits of unsecured car loans
- No asset as collateral: The car is less likely to be impounded if you default on your loan, which you might want if you’re buying the car as a gift for someone. However, this does not mean that defaulting on your loan will not have consequences; Your creditworthiness is likely to be compromised and you could face serious lawsuits that can lead to stringent covenants obliging you to repay the debt (plus the lender’s court costs) in a variety of ways (e.g., handing over wages or forced sale of assets).
- Low interest rate as a personal loan: Although your interest rate is 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 want, as long as you can afford it. This means that your loan can cover the cost of your car and any other car-related fees (registration, insurance, etc.).
Disadvantages of unsecured car loans
- Higher interest rate than secured car loans: As mentioned earlier, since unsecured car loans are riskier, this will likely be reflected in your interest rate. You are likely to pay more interest on your loan than if you took out a secured car loan.
- Stricter admission criteria: Again, the eligibility criteria for unsecured car loans are usually much stricter due to their higher risk and you will likely need a good credit history.
- Possible legal steps: If you default on your unsecured car loan, you won’t lose your car, but you could face legal action. Your information could be given to a collection agency, or it could file a civil suit to get the money owed. However, this only applies if you default on your loan.
How to compare unsecured car loans
When you look at your options, however small they may be, there are still ways to compare and choose the unsecured car loan that is best for you.
There are a few things to look out for when comparing loans.
You should compare the available auto loan interest rates as well as the type of interest rate (fixed or variable). This can have a big impact on how much you end up paying back in interest charges. Finding a competitive interest rate can depend on your credit rating, how much you want to borrow, and the lender.
In addition to the interest rates, comparative interest rates should also be considered carefully. The comparative interest rate reflects the interest rate plus other fees and charges, giving you a better idea of how much you will end up paying back in total. Other fees and charges may include monthly fees, setup 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. In general, the longer the loan term, the lower the monthly installments. While the repayment amounts can be smaller, they add up over time and usually mean you pay more in interest costs. If you want to save as much on interest as possible, a short-term unsecured car loan may be suitable. If you can’t afford those monthly repayments, you may need a longer-term arrangement.
You should also consider whether you are repaying your loan monthly or fortnightly as this may affect your calculated interest. With monthly payment, this corresponds to 12 monthly installments. But if you pay 14 days, that adds up to 13 months of repayment (provided the repayments are exactly half the monthly repayments – some lenders calculate this differently). So if you pay fortnightly instead of monthly, you may pay off your loan faster and with less interest.