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What Are Secured Car Loans?

How do secured car loans work? 

Have you been contemplating financing a new car but you’re worried about the costs? We all love a bargain so regardless of whether you’re buying a new or used car, you want to find the lowest interest possible. Finding secured car loans can help you lower the overall cost of your loan. 

At Jacaranda Finance, we’ve decided to make a complete guide to secured car loans. Everything you need to know from interest rates to how to secure a car loan will be provided below. Ready? Let’s go! 

What is a secured car loan?

If you’ve been on the hunt for a car loan, chances are you’ve been seeing the term ‘secured’ a lot. So what does this actually mean? A secured car loan is a method of borrowing money that requires you to attach an asset (also referred to as collateral) to your loan. This asset is something of value that the lender will use to cover the cost of a loan in the event that it fails. Assets that are commonly used as collateral include cars, motorbikes, caravans and boats. 

When you apply for secured car loans, most lenders will require that you attach the car you are purchasing to your loan. If you’re unable to afford the repayments on the loan, the lender has the option to repossess your car to cover the cost of the loan. However, this is usually only done as a last resort.

There are some restrictions with secured loans that you should keep in mind. Taking out a secured car loan for a car might mean that you will have to purchase a new vehicle in good condition or of a certain value. This vehicle will be used as security which means it can get repossessed if you fail to make your repayments.

Secured car loan vs Unsecured: What’s the difference

There are a few key differences between secured and unsecured loans. These are: 

• Loan amount flexibility: You have more restrictions as to how the funds can be used with secured loans. For example, the funds from secured car loans can’t be used on things such as car registration, insurance, or other costs. This is mainly because the entire loan amount is secured by the cost of the vehicle. Unsecured loans, on the other hand, have no restrictions. This means that the funds can be used for the listed factors above. However, unsecured loans tend to have higher interest for the loan amount borrowed.
• Car requirements: As mentioned before, you will have to meet certain requirements if taking out a secured car loan. You may not be able to take out a secured car loan to finance a car that’s under a certain value. However, unsecured car loans allow you to use the funds on any type of car of any age.
• Interest rates: Rates on secured car loans tend to be a lot more competitive than unsecured loans.
• When you default: Defaulting consistently on a secured loan means the asset provided may be repossessed to recoup the loss. If you default on an unsecured loan, then the lender doesn’t have an asset to repossess. However, keep in mind that you want to completely avoid default as that could have a major impact on your credit score.

Secured car loans: Fixed vs variable rates

When taking out a secured car loan, it’ll come with either a fixed or variable interest rate. It’s important to choose the rate that will best suit your budget, goals, and meet your needs. Here are some of the differences between fixed and variable interest rates. 

• Fixed Interest rate: This is a rate that will remain fixed for the entire loan term. They can be helpful as you would know what to expect and can calculate the total cost of your loan. However, they can get tricky as you generally won’t be able to make additional payments to have the loan end early. If you were able to make additional payments, you might be restricted to how many you can make. If you’re not allowed to make early repayments and you do anyways, you could get charged a penalty.
• Variable Interest rate: Variable interest rates fluctuate depending on market rates and other factors. These rates can be both an advantage and a disadvantage to borrowers as the rate could either increase of decrease. Another benefit is having the ability to repay the loan early by making additional repayments through your loan term.

Read more about how to find the lowest car loan rates here!

Benefits of secured car loans

There are many benefits and some drawbacks to secured loans. One of the benefits is the competitive interest rate that comes with secured loans. They usually come with lower interest rates than unsecured loans. Additionally, the vehicle provided as an asset doesn’t necessarily have to be completely brand new. It varies by lender but the majority will require a car that’s no older than 5 years. 

One of the major drawbacks with taking out a secured car loan is risking your vehicle. Although having your car as collateral tends to improve your car loan rate, it also means that defaulting on your loan could cost you your car. It’s recommended you take out a loan when it’s completely necessary and you are confident you can keep on top of your repayments and pay it back in full. 

Choosing a secured car loan

When considering applying for secured car loans, here’s what you should look out for:

• The loan amount – How much are you needing to borrow for the car?
• Loan term – How long can you manage to fully and comfortably repay the car?
• interest rate –  Keep an eye out for which is lower and which suits your financial situation over the term of your loan.
• Fees – Make sure you’re taking into consideration all the fees that you have to pay throughout your loan term. Those fees can be upfront, ongoing, annual, or even early exit fees.  

What documentation will you need to provide?

Before applying for a loan, here are the documents you’ll want to organise to provide. These include but are not limited to:

• Personal details like your online banking & employment info; 
• An active email address and mobile number;
• The reason you are applying for the loan; 
• Your MyGov details (if you are receiving Centrelink payments);
• Employer and contact details.

Want to read more? Learn about bad credit car loans here!