Unsecured car loans

At CarLoans.com.au, we can help you get the best possible rate on your car finance. We choose from hundreds of loans offered by almost 30 different lenders to find a finance solution tailor-fit to your needs.

What is an unsecured car loan?

An unsecured car loan is a type of loan where you don't need to put up any asset as collateral. If you fail to make your repayments or default on the loan, the lender won't be able to repossess your car.

For unsecured loans, lenders scrutinise your financial history and creditworthiness to ensure that you'll be able to confidently pay back the loan. Because there's no collateral or guarantee, some unsecured car loans have higher interest rates and fees.

Pros and cons of an unsecured car loan

Before you apply for unsecured car finance, make sure you weigh the pros and cons first. Understanding the benefits and disadvantages will help you make the right decision.

Advantages of an unsecured car loan

Here are some of the perks you can expect from an unsecured car loan:

• Better interest rates compared to other lines of credit. Unsecured car loans typically have lower interest rates compared to credit cards and short-term personal loans.

• Your car won't get repossessed. You won't have to worry about having your vehicle taken away in case you don't make the repayments. This is great for those who heavily depend on their car during day-to-day use.

• Less likely to have extra repayments or early payment penalties. Unsecured car loans carry more risk for lenders. Without collateral, they have no way to recoup costs if you default on the loan. It's why some lenders don't impose penalties on borrowers if they want to make extra payments or pay out early.

Unsecured loans work similarly to home loans or personal loans in terms of process and repayment schemes. For those who have taken out similar loans before, they may find it easier to get an unsecured loan as it's more familiar.

Drawbacks of an unsecured car loan

Every car loan option has some downsides. Here are some disadvantages of getting an unsecured car loan:

• More stringent eligibility requirements. Lenders are much stricter on borrowers applying for unsecured car loans. To get approved for unsecured car finance, usually, borrowers need to have an excellent credit score, a great financial history, and a high income. Some lenders may also ask for a deposit which is not usually required for car loans.

• Higher interest rates and shorter loan terms. Lenders may charge more interest and higher fees for unsecured loans than secured ones. Because lenders see unsecured loans as a higher financial risk, they try to compensate for it with higher rates. The shorter loan terms also contribute to high monthly, fortnightly, or weekly repayments.

• Borrowers could get into legal trouble. If you default on your loan, your information could be sent to a debt collection agency. Or, worst case scenario, the lender could resort to legal action and file a civil lawsuit against you.

As you can see, there are some serious disadvantages to unsecured loans. However, this type of loan does provide flexibility and a quicker application process because you don't have to include details of the asset being used as collateral.

Types of unsecured car loan

Unsecured car loans come in two types: fixed and variable. The difference is in the way interest rates are charged.

Fixed unsecured car loan

Unsecured car loans with a fixed rate have the same interest rate throughout the loan term. Your repayment amount stays the same every time regardless of outside market factors or lender rate changes. Knowing how much you're going to pay every time makes this unsecured loan option appealing to a lot of borrowers.

Variable unsecured car loan

A variable unsecured loan carries the possibility of changing interest rates. During your loan term, the amount of interest you pay changes depending on lender funding costs and market conditions, amongst a number of other factors. If your lender lowers their interest rates, the interest you pay on your variable unsecured loan may fall as well. However, if your lender increases the rates, you can expect a higher interest rate on your loan.

Which type of unsecured car loan is better?

It depends on your financial situation and what you want out of your car finance. If you want to know the total cost of your loan upfront, a fixed unsecured car loan may be your best option. For those who want to try and maximise potential savings, a variable unsecured car loan may be a good idea.

What should you look for in an unsecured car loan?

The ideal unsecured car loan would be one with low rates and favourable terms. Here's what you should keep an eye out for when searching for the best car loan:

• Comparison rates - These rates pertain to not only the interest rate of the loan but additional fees, as well. Some loans advertise a low or even zero interest rate only to charge exorbitant fees. By looking at the comparison rate, you avoid falling trap of expensive hidden fees.

• Loan features - A loan with features like balloon payments or redraw facilities can benefit your financial situation. Also, having a loan that lets you make extra repayments without fees or penalties can help you save on interest fees.

• Repayment frequency - See if your unsecured car loan allows for more frequent repayments. If you can pay weekly or fortnightly instead of monthly, you may be able to reduce the overall cost of your loan and shorten your loan term.

For an easier time finding the perfect loan, CarLoans.com.au is here to help! We'll connect you with our vast network of lenders to find the best car finance solution for you.

Questions? We can help.