What is an unsecured auto loan?
An unsecured car loan is a less common type of car loan in Australia, where you don’t need to offer the car or any other asset – as collateral on your loan. Without this security in place, you will find that your options are more limited and you will likely have to pay a higher interest rate.
Most auto loans are secured loans and the car is usually the asset used as collateral. Auto loans are usually large amounts because cars are expensive, so it can be considered risky to lend money without collateral as a backup plan.
With a secured car loan, if you default on your loan, the lender could repossess your car. Although you have a short window to resolve the situation, the lender could sell your car to make up for their losses. This is why secured auto loans usually come with lower interest rates because lenders have that security to fall back on.
Unsecured auto loan fees
There are two types of interest rates for unsecured auto loans: fixed rate or variable rate. With a fixed rate, you will pay the same interest rate for the duration of your loan. This can be useful to know exactly what your repayments will be each month and how much you will repay overall. On the other hand, with a variable rate, your interest rate can go up or down. You can save money if interest rates go down, but you could end up paying more if interest rates go up. This can complicate budgeting.
Advantages and disadvantages of unsecured auto loans
If an unsecured car loan sounds like it’s right for you, let’s discuss some of the pros and cons so you can make the most informed decision.
Advantages of Unsecured Auto Loans
No Collateral Assets: The car is less likely to be repossessed if you fail to repay your loan, which you might want if you are buying the car as a gift for someone. However, this does not mean that there are no consequences if you default on your loan; your credit score will likely take a hit, and you could face harsh legal proceedings that could result in strict mandates forcing you to repay the debt (plus the lender’s legal costs) through various means (for example, restitution of salaries or the forced sale of assets).
Lower interest rate than a personal loan: Although your interest rate is higher than a secured auto loan, unsecured auto loans 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 could cover the cost of your car, any other car-related costs (registration, insurance, etc.).
Disadvantages of Unsecured Auto Loans
Higher interest rate than secured auto loans: As we mentioned, since unsecured auto loans are riskier, this will likely be reflected in your interest rate. You will likely pay more interest on your loan than if you had taken out a secured car loan.
Stricter eligibility criteria: Again, due to their higher risk, the eligibility criteria for unsecured auto loans are usually much stricter and you will likely need a good credit rating.
Potential legal action: If you fail to repay your unsecured auto loan, you won’t lose your car, but you could be subject to legal action. Your information could be given to a debt collection agency, or they could take civil action to get money owed to them. But that’s only if you fail to repay your loan.
How to Compare Unsecured Auto Loans
When considering your options, while they may be slim, there are always ways to compare and choose the best unsecured car loan for you.
There are a few things you should pay attention to when comparing unsecured loans.
You should compare the interest rates available on car loans, as well as the type of interest rate (fixed or variable). This can greatly influence the amount you will end up paying back in interest charges. Finding a competitive rate may depend on the quality of your credit score, the amount you are looking to borrow, and the lender.
In addition to interest rates, comparison rates should also be carefully considered. The comparison rate reflects the interest rate plus other fees and charges, so you can get a better idea of how much you’ll end up paying back overall. Other fees and charges may include monthly fees, setup fees, etc.
term of the loan
You should also consider the length of the loan, as this can affect how much you pay back in interest. In general, the longer the term of the loan, the lower the monthly repayments. However, while the repayment amounts may be smaller, they add up over time and usually mean you pay more interest. If you want to save as much interest as possible, a short-term unsecured car loan may be suitable. If you can’t afford these monthly repayments, you may need a longer-term agreement.
You should also consider whether you will repay your loan monthly or fortnightly, as this may affect the interest charged. If you pay monthly, that equals 12 months of repayments. But if you pay fortnightly, that’s 13 months of repayments (as long as the repayments are exactly half the monthly repayments – some lenders calculate this differently). So paying fortnightly rather than monthly can allow you to pay off your loan faster and with less interest.