What Is a Secured Car Loan and How Does it Work?

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Perhaps you’ve been wondering what is a secured car loan as you’ve laid your eyes on your dream vehicle, but you need financial help to get it.

Well, it’s a type of financing that includes your vehicle as collateral against the loan, but it does come with several useful benefits, and we tell you all about them below.

Let’s get to it!

What Are Secured Auto Loans?

As the name implies, a secured car loan is a type of financing product in which the asset you are purchasing (the motor vehicle) is held as security against the loan.

Therefore, in the unlikely event that you are unable to repay the borrowed amount, the lender will repossess the car as collateral and sell it to recoup its losses.

Secured vs Unsecured Car Loans

Since secured vehicle loans are less risky for lenders, they tend to offer much better terms and conditions than unsecured loans, and we outline them all in the following table:

Secured car loanUnsecured car loan
Lower average interest rates of around 5% (often fixed)Higher average interest rates of around 10% (often variable)
Fewer and lower ongoing costsHigher management and application fees
Lower top borrowing limits of around $20,000Higher top borrowing limits of around $100,000
The full loan amount must be used to purchase the new vehicleYou can use portions of the loan for other related purposes
Cannot sell the vehicle while paying it offYou can sell the vehicle if you want
Obtainable with a mediocre credit scoreRequires a good credit score in Australia
For newer high-value vehicles not older than 5 yearsFor older low-value vehicles of any age
Looser eligibility criteriaStricter eligibility criteria
Vehicle is used as collateralNo collateral involved

As you can see, while secured car loans work similarly to mortgages, wherein you keep the asset only after completely paying it off, unsecured loans do not include any collateral conditions that cause loss of assets if and when you default on your debt.

Therefore, to determine the best type of car financing for you, consider the type of vehicle you need, how much you can borrow, how fast you can repay the loan, and whether or not you want the freedom to retain and/or dispose of the vehicle as you see fit.

How Does a Secured Car Loan Work?

While the process of getting secured auto loans varies from lender to lender, applicants still more or less follow very similar steps:

  1. Check your credit score to know how much you can borrow as an Aussie;
  2. Learn when is the best time to buy a car in Australia;
  3. Compare lending institutions and apply for pre-approval with one of them;
  4. Ensure you meet the eligibility requirements and collect the necessary documents;
  5. Choose the vehicle you want to purchase and inform the lender;
  6. Wait for your lender to approve your application and transfer the funds;
  7. Purchase the vehicle and stay on top of your repayments.

If you discover you are unable to pay off your current loan on time, you may be able to refinance your vehicle with a new credit product with better terms.

The chances of that occurring, however, are rather slim, as evident by the fact that 20% of new car purchases are successfully done with the help of a car loan.

Requirements for Secured Car Loans

To consider you for a secured car loan, banks will first ensure you meet their eligibility criteria, which may vary from lender to lender but typically include:

  • You are 18 years of age and a permanent Australian resident;
    • You will need proof of identity and residence.
  • You have sufficient regular income and a good credit score;
    • You will have to submit proof of income such as pay stubs, tax returns, or evidence of other types of income.
  • You own other assets besides the car you are purchasing;
    • While optional, proving you are asset-backed goes in your favour.

Your lender must also approve the vehicle you are looking to buy, as secured loans are only offered to applicants getting newer and more valuable cars since they can be better used to recoup any losses banks may incur in cases of loan default.

Bottom Line

With all the benefits outlined above, buying a car with secured loans seems like the better option, as you can borrow more for a newer and better vehicle and pay less over the long term. But, if you are looking to buy an older and cheaper car without fear of losing it if you miss out on your payments, unsecured loans might be the way to go for you.


1. How do I know if my car loan is secured?

You are applying for a secured loan if your lender requires your newly-purchased vehicle as collateral and retains the car title.

2. Can you use someone else’s car as collateral for a loan?

Lending institutions may accept a car title in a different name than the one on the application, but the owner will be putting the car at risk if the loanee defaults on the loan.

3. Where can you get a secured car loan?

Most Australian banks and lending institutions offer different types of vehicle loans and can answer any question you might have in detail, from what is a secured car loan to the benefits it comes with, and how it differs from other types of credit products.

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