Secured car loan must knows
Did you know you can use the vehicle you're purchasing as security for a car loan?
In return the lender will give you a better interest rate and lower fees, saving you big bucks over the life of your loan - this is called a secured car loan.
While it may sound like a great option, before you commit, here are a few things to keep in mind:
1. Secured loans put your assets at risk
The reason lenders reserve their best car loan deals for borrowers who use their car as security for a personal loan is because they know if you fail to repay the loan, they can sell your car and get their money back.
That's why before you take out a secured loan you should always do your sums to
ensure the ongoing repayments won't be too much of a money drain on
your finances. Our car loan repayments calculator will help you figure out the right loan amount for your situation.
If you're not comfortable with putting your new car in direct risk, you can opt for an unsecured loan, which doesn't mean you have to legally give up your car to the lender if you default on the loan. But they could still chase you in court to regain their loss and your credit rating will be impacted negatively.
2. The car will need to be fairly new
Generally speaking, if you want to use the car you're purchasing as security, the
lender will require the car to be no more than 5 years old. This is because if the lender needs to sell the car, they will want to ensure that they get enough money back to cover their loss, which can be more difficult with older cars.
3. You can borrow larger amounts
Has that new Porsche 911 caught your eye? Well, if you own a property you
can also use this asset as security for a car loan and the provider will be more inclined to lend you a larger amount (with many offering secured car loans with maximum borrowing amounts of $100,000 and over), as you're deemed a lower risk.
But of course, just like using the car you are buying as collateral, using your home as security will put it at risk if you're unable to service the car loan.
4. Providers will require you to have comprehensive cover
Also keep in mind that many banks will require you to take out comprehensive
car insurance (which covers damage to your car, other people's car and
property etc) to be eligible for a secured loan. But when you consider
that you'll be covered for all those unforeseen mishaps on the road,
this isn't necessarily a bad thing.
5. Once you’ve paid off the loan the collateral is lifted
The great thing is if you diligently repay your car loan on time each month
and in full, you will pay off the secured loan in the agreed timeframe,
the security over your asset will be removed and those new wheels are
officially all yours.
What should I look for in a secured car loan?
Now that you've read our secured loan must knows, here are some of the things you should consider when choosing a car loan.
- Fixed vs variable: Car loans come with two different interest rates. A fixed rate will mean the interest rate stays the same over the life of the loan, giving you the security of set monthly repayments. On the other hand, a variable rate can change at any time so your repayments could go up or down. The reason many borrowers choose loans with variable rates is because they are generally lower than fixed.
- Fee free extra repayments: While you might decide to take out a car loan for a lengthy period, with the handy feature of an extra repayments facility you could vastly reduce that timeframe by putting extra money towards your loan, for instance when you receive a sizeable tax return or work related bonus. On a $20,000 car loan with a 15% interest rate paid back over 5 years, if you made a monthly extra repayment of $200 you would save $3,418 in interest and reduce the life of your loan by 1 year and 10 months.
- Redraw facility: Another feature that could come in handy is a redraw facility, allowing you to draw on any extra repayments you've made. However a word of caution applies here as any money you take out of your car loan will increase the length of the loan and the total interest you pay.
- Flexible repayments: We would also recommend choosing a car loan that lets you select what your repayment cycle will be - weekly, fortnightly or monthly. Selecting the weekly or fortnightly option is a savvy way to get ahead on your repayments, as by dividing your monthly repayment into two fortnightly repayments or four weekly repayments you will effectively make an extra month's repayment each year without even noticing it.