What Is a Secured Car Loan? A Simple Guide for First-Time Borrowers

So, you're buying a car – exciting times! You've probably got a good idea of your budget, the model you've got your eye on, and maybe even the colour. But have you thought about financing? And are you familiar with all the options available to you?

When it comes to car loans, you'll likely come across two main types: secured and unsecured loans. While both have their benefits and responsibilities, having a thorough understanding of your options will help you make the best decision for your situation.

In this post, we'll walk you through everything you need to know about secured car loans. From what they are, to their benefits and key considerations, and whether you might be eligible for one.

What is a Secured Car Loan and How Does It Work?

A secured car loan is a type of loan where you borrow money using an asset as collateral—usually the car you're buying. Put simply, the car acts as security for the lender.

For example, if you are looking to borrow $25,000 for a car, the vehicle itself will be used to secure the loan.

But, what does that really mean for you? If for any reason you can't keep up with the repayments, the lender has the right to repossess the car and sell it to recover the outstanding balance. However, It also allows lenders to offer better loan terms, such as lower interest rates and the ability to borrow a larger amount.

However, it's important to understand the responsibilities involved. While the car is being used as collateral (and you are making your payments), you're free to drive and use it as you normally would. However you must follow certain rules:

The vehicle needs to be in your name
You need complete insurance coverage
The car must stay in good working condition
Some lenders want the car to be under 7 years old when you finish paying

If, for some reason, the worst happens and the lender does repossess the car, they can only do so after following a strict process. They must send you a notice and give you 30 days to pay what you owe. If you don't settle the debt or make payment arrangements within that time, then they can take the car.

Secured Vs Unsecured Loan

When you're looking at financing a car, one of the first decisions you'll need to make is whether to go with a secured or unsecured car loan. The choice you make can affect everything from your approval chances to how much you end up paying over the life of the loan.

A secured car loan is the more common option, and it works in a similar way to a home loan. With this type of loan, you're using the car itself, or another asset like property, as collateral. This means if you can't keep up with the repayments, the lender has the right to repossess the car and sell it to recover the loan amount.

The benefit of secured loans are that they tend to come with lower interest rates and better terms because the lender's risk is reduced, making them the best option for people buying new or higher-value vehicles.

On the other hand, unsecured car loans don't require you to put up any collateral. Since there's no security for the lender, the loan is considered higher-risk. If you default on the loan, the lender can't simply take back your car (or any other asset), which means the lender may need to take legal action to recover the debt.

Because of the higher risk involved, unsecured car loans generally come with higher interest rates than secured loans. Lenders tend to be more selective about who they approve for these loans, so the better your credit score, the better your chances of being approved. These loans are better for cheaper ($10,000 or under) or older cars.

Secured Vs Unsecured Car Loans: A Quick Comparison

Feature	Secured Car Loan	Unsecured Car Loan
Collateral	Requires an asset (typically the car) to act as security.	No collateral required.
Risk for Lender	Lower risk as the lender can repossess the car if payments aren’t made.	Higher risk since there is no asset to reclaim.
Interest Rates	Generally lower interest rates due to reduced lender risk.	Higher interest rates because of the increased risk.
Approval Chances	Easier to get approved, especially if you have good credit.	Can be harder to get approved, and requires a good credit score.
Loan Amount	You can typically borrow more money since the loan is secured.	Borrowing amounts are usually lower.
Loan Term	Flexible terms, often with longer repayment periods.	Typically shorter terms.
What Happens if You Default?	Lender can repossess and sell the car to recover the loan.	Lender may take legal action to recover the debt.
Best for	Newer or higher-value cars.	Older or lower-value cars (usually under $10,000).
Freedom to Choose Vehicle	Limited to vehicles within the loan amount and collateral.	More freedom in choosing your car.
Guarantor Option	Not typically needed.	A guarantor (e.g., family member) can help with approval.
Eligibility Requirements	Often easier to qualify for with a good credit score.	Requires a good credit score, but can be harder to qualify for.

The Key Benefits Of Secured Loans

If you are a first-time car buyer, or are looking at purchasing a brand new car, a secured car loan offers a number of benefits. These include:

Lower Interest Rates

One of the biggest advantages of a secured car loan is the lower interest rates. You could secure a fixed rate starting from as low as 6.49% p.a. (depending on your credit history and loan terms).

This is much more affordable than the rates typically offered with unsecured loans, where interest rates can be significantly higher. Lower interest means you'll be paying less over time, potentially saving you thousands in the loan term.

Higher Borrowing Limits

With a secured car loan, there is less risk for the lender, which allows you the opportunity to borrow more money. Loan amounts typically range from $15,000 to $150,000, depending on your credit history, income, and the car's value. In comparison, unsecured loans usually cap around $75,000.

This increased borrowing power means you can purchase a higher-end vehicle or even cover additional costs like registration, insurance, or car accessories without stretching your budget too thin.

Easier Approval for Borrowers

Secured car loans are a great option for those with lower credit scores. Since your car serves as collateral, lenders are less concerned about the potential risk of lending you money. This makes it easier to get approved for a loan compared to unsecured options, which can be stricter in their approval processes. It's a great way for first-time buyers or those looking to rebuild their credit to get into the driver's seat.

Flexible Loan Terms

Secured car loans offer flexibility in how you structure your repayments. You can choose a loan term that best suits your finances, typically ranging from 1 to 7 years. With fixed interest rates, you can easily plan your budget without worrying about unexpected rate hikes. Some lenders even allow you to make balloon payments, reducing your regular payments during the loan term. Additionally, many secured loans don't charge early repayment fees, so you're free to pay off your loan ahead of schedule without any penalties.

The Considerations Of Secured Car Loans

While secured loans offer many benefits for the buyer, it's important to understand the responsibilities and potential risks involved too. Here are some things to keep in mind before you decide to sign on the dotted line:

Risk of Losing Your Car

The biggest consideration with a secured car loan is the risk of losing your vehicle if you can't repay the loan. If you miss payments, the lender has the right to repossess your car. In some cases, repossession can happen after just one missed payment, depending on the terms of your loan and local regulations. Once repossessed, your car is usually sold at auction to recover the money you owe.

However, if the sale of your car doesn't cover the full loan balance, you'll be left with a deficiency balance. This means that you'll still need to pay the difference. In the worst-case scenario, the lender may take further action like garnishing your wages (the legal process where the lender recovers unpaid debt directly from your wages) or putting a lien on your property (the ability to seize and sell the property if debt isn't paid) to recover the remaining amount.

Impact on Your Credit Score

Your credit score can take a serious hit if you default on your secured car loan. Payment history makes up a large portion of your credit score, so missing payments can significantly lower your score.

A default can stay on your credit report for up to seven years, making it harder to get approved for future loans or credit cards. Even if you eventually pay off the debt, the negative indicator can follow you, leading to higher interest rates on future loans or even outright rejection from lenders.

Possible Additional Fees

While secured car loans can offer lower interest rates, they may come with additional fees that increase the overall cost of the loan. These fees might include set-up fees, monthly account fees, or late payment penalties. It's important to understand the full cost of the loan, including any extra charges, to ensure that it fits within your budget.

Insurance Requirements

Since your car serves as collateral, lenders typically require you to have comprehensive car insurance to protect the asset. This goes beyond the basic Compulsory Third Party (CTP) insurance that is legally required.

Some lenders may even ask to be listed as an "additional insured" party on your policy to ensure they are covered in case of a claim. Additionally, many lenders will require proof of your insurance each year, which can be an ongoing cost to factor into your budget.

Understanding The Costs Of Secured Car Loans

When taking out a secured car loan, there are several costs to consider. Understanding these expenses upfront can help you choose a loan that fits your budget and financial goals.

Most secured car loans come with two main types of interest rates: fixed and variable.

Fixed interest rates mean your repayments stay the same throughout the loan term. This makes budgeting simple and protects you from market fluctuations. However, some lenders charge penalties if you pay off the loan early.
Variable interest rates fluctuate based on market conditions. If interest rates drop, you could save money, but if they rise, your repayments could increase. However, variable rate loans often offer more flexibility, like extra repayments without penalties or access to redraw facilities.

In addition to interest rates, there are additional charges and fees to consider:

Application or establishment fees: A one-time fee to set up your loan.
Monthly account-keeping fees: Ongoing charges that add up over time.
Early payout fees: Some lenders charge a fee if you repay your loan ahead of schedule.
Missed or late payment penalties: Extra costs if you fall behind on repayments.

The Role of Comparison Rates

When shopping for a car loan, you'll likely come across comparison rates. A comparison rate is not the same as the advertised interest rate – the amount a lender charges for borrowing money, expressed as an annual percentage.

A comparison rate reflects the real cost of a loan, including certain fees and charges. Often, a car loan might seem attractive due to a low interest rate. However, hidden fees and charges can significantly increase the overall cost of the loan

The comparison rate is designed to give you a more accurate picture and is calculated using a standard formula as outlined Australian government regulations:

The amount borrowed
The term of the loan
The frequency of loan repayments
The interest rate
Most fees and charges

Let's consider a simple example of two different car loan options:

Car Loan A: Has an interest rate of 6.50% with fees and charges of 0.5%. By adding these together, the comparison rate is 7.00%
Car Loan B: Has a lower interest rate of 6.30% but includes higher fees and charges of 0.9%. This results in a comparison rate of 7.20%

Here, you can see that even though Car Loan B has a lower interest rate, its higher comparison rate (7.20%) shows that it would actually cost the borrower more over the life of the loan compared to Car Loan A (7.00%)

When using comparison rates, it's vital to compare loans with the same loan amount, terms, and any extras like balloon payments to get an accurate understanding of the costs. Different terms, fees, or loan amounts can result in different comparison rates.

Lenders are legally required to show you this rate so that you can compare loans from other lenders. While comparison rates are a great starting point for evaluating loan options, they shouldn't be the only factor in your decision. Always review the full fee structure and terms to make sure you're getting the best deal.

Eligibility Criteria for Secured Car Loans

While criteria can vary between lenders, most follow similar guidelines when it comes to your credit score, income, and the vehicle itself.

Credit Score

Your credit score plays a huge role in loan approval and borrowing power. While there's no universal minimum, most lenders prefer a score of 600 or higher. But, a strong credit history doesn't just improve your chances of approval, you may even get better interest rates too.

Australian credit agencies rank scores as: ✔ Excellent (800-1000) ✔ Very good (700-799) ✔ Good (625-699) ✔ Fair (550-624) ✔ Below average (300-549) ✔ Poor (0-299)

Lenders will also review your payment history, which makes up about 35% of your credit score. Even one missed payment can negatively impact your rating, so keeping up with bills can make a big difference.

Income and Employment

Lenders need to see that you have a steady income to ensure you can manage your repayments. While minimum income levels vary, stable employment is a big plus. Most lenders prefer borrowers with at least three months of continuous employment, though longer work history is even better. If you're self-employed, you may need to provide extra documentation to show your earnings.

Vehicle Requirements

Not every car may qualify for a secured loan. Common requirements include:

No older than 7 years at the time of application
Registered in your name
Never written off, even if repaired
Locally made or an official manufacturer import
Fully insured, with the lender listed as the financier
For personal use only (business use may need a different loan type)

Tips for Managing Your Secured Car Loan

Once you've secured your car loan, smart management can save you thousands and help you avoid the risk of losing your vehicle.

Stay on Top of Your Payments

Timely payments are essential for avoiding late fees and keeping a strong credit score. Lenders will usually process payments on the next business day if your due date falls on a weekend or holiday. If your repayment date doesn't exist in a month (like the 31st of February), they'll process it on the last available calendar day. Be sure to:

Set up automatic payments to never miss a due date
Use payment reminders if you prefer to pay manually
Budget for car expenses, especially if your loan has a variable rate that could change over time

Consider Refinancing

If interest rates drop or your credit score improves, refinancing your loan could lower your repayments or offer better loan features. Before making the switch, consider:

Early exit fees from your current loan
A longer loan term might reduce monthly payments but increase the overall interest paid
Timing is key to securing a lower rate

Pay Off Your Loan Early & Save on Interest

If there are no penalties or fees, making extra repayments is a great way to cut down your interest costs and pay off your loan faster.

Round up your payments. Even small amounts can save you on interest.
Switch to fortnightly payments. This adds an extra repayment helping you clear your debt sooner.
Use windfalls wisely. Tax refunds, bonuses, or unexpected cash can go straight toward lump-sum payments.

Key Takeaways

A secured car loan can be a smart way to finance your next vehicle, offering better interest rates and higher borrowing power. But like any financial commitment, it's important to understand the terms, eligibility criteria, and repayment strategies to make the most of your loan.

But, if you're looking for expert guidance, Mason Finance Group is here to help. As a boutique finance brokerage on the Sunshine Coast, we work with over 60 banks and lenders to find competitive car loan options that suit your needs. Get in touch today and drive away with confidence!