When you finance a car in Australia, one of the first choices is whether the loan is secured or unsecured. The difference between a secured vs unsecured car loan comes down to one question: does the lender take the car as security for the debt? That single choice affects the rate you may be offered, what happens if you cannot pay, which cars you can buy and how much paperwork is involved.
The short answer: a secured car loan uses the car you are buying as security, so the lender can repossess and sell it if you do not make your repayments. An unsecured car loan, usually an unsecured personal loan, does not use the car as security, so the lender cannot take the car, but the interest rate is often higher.
What a secured car loan is
Moneysmart, the government's consumer finance site run by ASIC, describes a secured loan as one where, if you do not meet your repayments, the lender can take your vehicle and sell it to cover the loan. Most dedicated car loans work this way. The car you buy with the loan becomes the lender's security until the loan is repaid.
In practice, the lender commonly registers its interest in the car on the Personal Property Securities Register (PPSR), the national register of security interests. When the loan is paid off, that security interest should be removed, and the car is yours free of the lender's claim.
Because the lender has an asset it can recover if things go wrong, it takes on less risk. That is why Moneysmart notes that the interest rate on an unsecured loan is often higher than on a secured loan.
What an unsecured car loan is
An unsecured car loan is usually an unsecured personal loan that you use to buy a car. According to Moneysmart, with an unsecured loan your car is not security, so the lender cannot seek to repossess it and sell it. These loans usually have higher interest rates, and some lenders may ask for a guarantor.
Unsecured does not mean consequence free. Moneysmart's personal loans guide points out that if you do not repay an unsecured loan, the lender can take legal action to recover the money. Missed repayments on either type of loan can also be recorded on your credit report.
Secured vs unsecured car loans side by side
- Security: a secured loan uses the car you buy. An unsecured loan does not use any asset.
- Interest rate: secured loans commonly carry lower rates, because the lender can recover the car. Unsecured rates are often higher.
- If you cannot pay: with a secured loan the lender can repossess and sell the car, and you may still owe the difference. With an unsecured loan the lender cannot take the car but can pursue the debt, including through legal action.
- The car you can buy: secured lenders set rules about the car itself, such as its age and value. Unsecured loans generally do not depend on the car at all.
- Loan size: secured lenders are commonly willing to lend larger amounts against a suitable car, while unsecured personal loans often have lower maximums.
- Paperwork: a secured loan needs the car's details, such as the VIN, before settlement, while an unsecured loan can often be settled into your account before you choose the car.
When the car decides the loan
Because the car is the lender's security, secured lenders care about what you are buying. Many set a maximum age for the car, often measured at the end of the loan term rather than at purchase, and some will not accept certain vehicles at all. If you are looking at an older car, a project car or something unusual, a secured loan may not be available for it. We explain the age rules in financing a car over 10 years old.
An unsecured personal loan avoids those rules, which is why buyers of older or cheaper cars sometimes use one, accepting a higher rate in exchange for flexibility. The reverse also applies: if you are buying a newer car and want the sharpest rate, a secured loan is often the better fit to compare.
What happens if you cannot keep up with repayments
With a secured loan, missing repayments can end with the car being repossessed. There are rules lenders must follow first, including a default notice, and you can ask for a hardship arrangement before it gets that far. Our guide to car loan hardship explains how to ask your lender for help and what protections apply.
It is also worth knowing that repossession does not always clear the debt. If the car sells for less than you owe, you can still be liable for the shortfall. Moneysmart warns that if you have to sell a car to meet the loan, the price you get might not cover the full debt, which is why negative equity matters.
With an unsecured loan, the car stays with you, but the lender can still take recovery action and your credit file can be affected.
How the PPSR protects car buyers
Secured car loans are the reason the PPSR matters when you buy a used car. The PPSR says a security interest means a car could have money owing on it and could be repossessed from you even though you have paid for it.
- A PPSR car search costs $2 and tells you whether a security interest is recorded against the car.
- The PPSR recommends searching on the day, or the day before, you buy, so the result is as current as possible.
- If you buy from a licensed motor vehicle dealer, you are generally protected from repossession even if a security interest was registered against the car.
- If you buy privately and do not search, any valid security interest registered against the car when you bought it could still be enforceable.
If you are paying for a private sale with a personal loan, our guide to a personal loan and a PPSR check walks through the steps.
How to decide which to compare
Neither type is right for everyone. As general information, a secured car loan is often worth comparing first if the car you want meets a lender's age and value rules and you want to keep the cost of borrowing down. An unsecured loan can suit a car that falls outside those rules, a smaller amount, or a buyer who does not want the car tied to the loan.
Whichever you look at, compare the comparison rate rather than the headline rate, because it includes most fees. Our explainer on comparison rate vs interest rate shows why.
- See advertised ranges on our car loan rates page.
- Check how each of the lenders we compare structures its car loans, secured or unsecured.
- Model repayments for different amounts and terms with our loan calculators.
- If you already have an unsecured loan on a high rate, refinancing to a secured car loan may lower your repayments, depending on the car and your credit profile.
Your credit history, income and the car itself will shape what lenders may offer you, so compare a few options before you commit.
