Almost every loan you’ll come across is either secured or unsecured, and the difference shapes how much you can borrow, what it costs, and what happens if things go wrong. For car finance in particular, “secured” is the normal arrangement, and understanding why helps you make sense of the offers you’ll see. Here’s what a secured car loan is, how it compares with an unsecured loan, and which suits which situation.
What “secured” means
A secured loan is one where the lender takes an asset as security. If the loan isn’t repaid, the lender has a legal right to take and sell that asset to recover what’s owed. The security reduces the lender’s risk, and lenders price and structure loans accordingly. An unsecured loan has no asset attached; the lender is relying on your ability and willingness to repay, assessed from your income, commitments and credit history.
What a secured car loan is
A secured car loan uses the car you’re buying as the security. You own and drive the car, and the lender registers its interest over it on the national register (the PPSR) until the loan is paid out. Once the final repayment is made, the lender’s interest is removed and the car is yours with nothing owing.
Because the car backs the loan, a secured car loan generally comes with:
- Better terms than an unsecured loan, since the lender’s risk is lower
- Higher borrowing limits, often the full purchase price
- Longer terms available, which lowers each repayment
- Easier approval for many borrowers, because the asset carries part of the risk
The trade-off is the obvious one: if you can’t keep up the repayments, the lender can repossess the car. In practice lenders treat that as a last resort, and talking to them early if you’re struggling usually opens up alternatives, but it’s the fundamental difference to understand.
For a walkthrough of the whole process from application to settlement, see our guide to how car finance works. The same secured structure applies to boat finance and most other asset lending.
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Book a chat with an Asset Finance Broker at Treadgold Finance today.
What an unsecured loan is
An unsecured loan has no asset behind it. Personal loans are the most common example: you borrow an amount and repay it over a term, and the lender’s only recourse if you don’t is to pursue you for the debt, not to take a specific asset. Because the lender carries more risk, unsecured loans generally cost more, are approved for smaller amounts, and lean harder on your credit history. Our guide to your credit file explains what lenders look at.
Secured vs unsecured: the differences that matter
Cost. Secured loans are generally priced lower than unsecured loans of the same size, because the lender’s risk is lower. How much lower depends on the lender, the asset and your profile.
How much you can borrow. Secured lending typically allows larger amounts, up to the value of the asset. Unsecured lending is usually capped at lower amounts.
Approval. The asset does some of the work in a secured application, which can help borrowers whose income or credit history is less than perfect. Unsecured approval rests entirely on you.
What you can use it for. A secured car loan buys the car that secures it. An unsecured personal loan can be used for almost anything, which is its main advantage.
If you can’t pay. With a secured loan, the lender can ultimately repossess the asset. With an unsecured loan, the lender pursues the debt through other means, and the default lands on your credit file either way.
Which suits which situation
- Buying a car, boat, caravan or bike: secured, almost always. It’s cheaper, allows a larger loan and is what lenders expect for an asset purchase.
- An older or unusual vehicle: sometimes unsecured, because some lenders won’t take a very old car as security. The loan costs more, but it can be the practical route.
- Borrowing for something that isn’t an asset, a holiday, a wedding, consolidating debts: unsecured personal loans are the usual tool, though some lenders offer a secured personal loan if you have a suitable asset to put up.
- Business borrowing: finance for a business asset such as equipment or a truck is secured against that asset, which is the basis of equipment finance and chattel mortgages. General-purpose business loans can be secured or unsecured, and the difference shows up in the pricing and the amount available.
A note on buying a used car
Because a secured car loan puts the lender’s interest on the PPSR, a car that still has finance owing carries that interest until the loan is paid out. If you buy privately, check the car isn’t encumbered before you pay, otherwise you can inherit someone else’s lender. It’s a quick search, and any broker arranging finance on a private sale will do it as part of the process.
The bigger picture
Secured lending against an asset is the foundation of car, boat, caravan and equipment finance in Australia, and understanding it makes the rest of the terminology, chattel mortgages, balloons, comparison rates, fall into place. Our guide to asset finance covers how it all fits together, and if you’re weighing up finance for a car now, our car loans page sets out what we arrange and how to get started.
Damo Treadgold is the director of Treadgold Finance, an FBAA-accredited finance broker on the Sunshine Coast, arranging car, boat, equipment and business finance Australia-wide.
Frequently Asked Questions
What is a secured car loan?
A car loan where the car itself is the lender’s security. You own and drive the car, the lender registers its interest until the loan is paid out, and it can repossess the car if the loan isn’t repaid. Secured car loans generally offer better terms than unsecured loans.
What is the difference between a secured and unsecured loan?
A secured loan is backed by an asset the lender can take if you don’t repay. An unsecured loan has no asset behind it and relies on your ability to repay. Secured loans are generally cheaper and allow larger amounts; unsecured loans are more flexible in what they can be used for.
Is a secured car loan better than unsecured?
For buying a car, usually yes: lower cost, higher limits and easier approval. Unsecured makes sense when a lender won’t take the vehicle as security, such as a very old car, or when you’re borrowing for something that isn’t an asset.
Can I get a secured personal loan?
Some lenders offer them, using an asset such as a car you already own as security. They can be cheaper than unsecured personal loans, but the asset is at risk if you don’t repay.
What happens if I can’t pay a secured car loan?
The lender can ultimately repossess and sell the car to recover the debt, though most treat that as a last resort. Talking to the lender early if you’re struggling usually opens up other options.
How do I know if a used car has finance owing?
Check the PPSR, the national register of security interests, before buying privately. A broker arranging finance on a private sale does this as part of the process.
