The main difference between a secured and unsecured car loan is whether an asset is used as security for the debt. With secured car finance, the vehicle will commonly secure the loan. An unsecured loan does not require the car to be listed as security. That difference can affect interest rates, lender requirements and what can happen if you stop making repayments.
Key takeaways
- ✓A secured car loan commonly uses the vehicle being financed as security for the debt.
- ✓An unsecured loan does not require the vehicle to secure the loan.
- ✓Secured borrowing can have lower interest rates because the lender has an asset as security.
- ✓If a vehicle secures a loan and you seriously fall behind on repayments, the lender may be able to repossess it by following the required process.
- ✓The better option depends on the actual rate, fees, terms and conditions available to you.
Secured vs unsecured car loans at a glance
Both secured and unsecured loans can potentially be used to fund a vehicle, but they structure the lender's risk differently. A secured loan gives the lender a security interest in an asset, while an unsecured loan does not require an asset to be listed as security.
The simplest difference is security: a secured car loan usually places a security interest over the vehicle, while an unsecured loan does not.
| Feature | Secured car loan | Unsecured loan |
|---|---|---|
| Vehicle used as security | Usually | No |
| Interest rate | Can be lower | Can be higher |
| Vehicle requirements | May apply | May be more flexible |
| Repossession of secured vehicle | Can be possible if contract conditions and legal requirements are met | Vehicle is not specifically securing the loan |
| Loan conditions | May include conditions relating to the secured vehicle | Not tied to security over the vehicle |
What is a secured car loan?
A secured car loan uses an asset as security for the debt. With vehicle finance, that asset is commonly the car being purchased. The security gives the lender additional protection if the borrower does not meet the obligations of the credit contract.
What does it mean when your car is security for a loan?
When a vehicle is listed as security, the lender has a legal interest in that vehicle while the secured debt remains in place. Your credit contract should disclose any security interest. This is important because the lender may have rights over the vehicle if you fail to meet the contract.
Can a lender repossess a car with secured finance?
Potentially, but repossession is subject to rules. Consumer Protection says a lender can only repossess a vehicle when the right is specified in the credit contract, the borrower has missed payments or broken another contract term, and the required warning process has been followed.
A secured loan does not mean a lender can simply take the car whenever it wants. Repossession rights and the required process are governed by the credit contract and New Zealand consumer credit rules.
What is an unsecured car loan?
An unsecured loan does not require you to list the vehicle or another asset as security for the debt. The lender therefore does not have the same security interest in the car as it would under secured vehicle finance.
Why can unsecured loans have higher interest rates?
Security reduces some of the lender's risk because there is an asset available as a fallback if the secured loan is not repaid. Without that security, unsecured lending can be priced at a higher interest rate. The actual rate still depends on the lender, the borrower and the particular loan.
Unsecured does not automatically mean expensive, and secured does not automatically mean cheap. Compare the actual offers available rather than assuming one structure will always have the lowest rate.
Are secured car loan rates always lower?
No. Secured loans can offer lower rates than unsecured borrowing, but there is no guarantee that every secured loan will be cheaper than every unsecured loan. Your credit profile, loan amount, term, lender, fees and other circumstances can all affect the overall cost.
Do secured car loans have vehicle restrictions?
They can. Because the vehicle is providing security for the loan, lenders may have requirements relating to the vehicle they are prepared to finance. Those requirements vary between lenders, so check the specific terms rather than assuming every vehicle will qualify.
Can you sell a car that still has secured finance owing?
A security interest can restrict what you are able to do with the vehicle while money remains owing. Consumer Protection notes that when a lender has registered a security interest in a financed vehicle, you generally cannot simply sell or give the vehicle away while that security remains. If you want to sell a financed car, contact the lender and find out what is required to settle or release its interest.
What happens when a secured car loan is fully repaid?
Once the secured debt has been fully repaid and the lender's interest has been dealt with, the vehicle is no longer securing that debt. If you are unsure whether a security interest has been released, ask the lender for confirmation.
Secured vs unsecured: which costs less?
Interest rate is important, but it is not the only cost to compare. Establishment fees, administration charges, the loan term and other costs can change which option is cheaper overall.
| Compare | Why it matters |
|---|---|
| Interest rate | Affects how much interest accrues on the loan. |
| Establishment fees | Can increase the initial cost of borrowing. |
| Ongoing fees | Can add to the cost throughout the loan. |
| Loan term | A longer term can increase total interest even if repayments are smaller. |
| Total amount repayable | Provides a better overall comparison than the headline rate alone. |
| Security conditions | Shows which assets are at risk if the contract is not met. |
Advantages of a secured car loan
The main potential advantage of secured car finance is access to more competitive pricing because the lender has security over an asset. Depending on the lender and application, secured finance may provide a lower rate or different lending options than unsecured borrowing.
| Potential advantage | What it means |
|---|---|
| Potentially lower rate | Security can reduce the lender's risk. |
| Designed for vehicle finance | The loan structure is specifically suited to financing a vehicle. |
| Different lending options | Security may affect the options a lender is prepared to offer. |
Disadvantages of a secured car loan
The biggest consideration is that the secured asset is exposed if the loan goes seriously into default. You may also have conditions relating to the vehicle while the security interest remains.
| Potential disadvantage | What it means |
|---|---|
| Vehicle is security | The lender has a security interest in the vehicle. |
| Repossession risk | The vehicle may be repossessed if the requirements for repossession are met. |
| Possible vehicle conditions | The lender may have requirements relating to the vehicle being financed. |
Advantages and disadvantages of an unsecured loan
An unsecured loan does not place a security interest over the car, which may provide more flexibility over the vehicle itself. The trade-off is that unsecured borrowing can carry a higher interest rate because the lender does not have the vehicle as security.
The main trade-off is straightforward: secured finance can potentially reduce borrowing costs, while unsecured finance avoids putting the vehicle up as security.
Which type of car loan should you compare?
There is no single loan structure that is automatically better for everyone. The useful comparison is between the actual suitable options available to you. Look at the rate, fees, repayments, total cost, loan term and security conditions before deciding.
| If this matters to you | What to compare |
|---|---|
| Lowest possible borrowing cost | Compare secured and unsecured rates, fees and total repayable. |
| Not using the car as security | Check whether suitable unsecured finance is available. |
| Regular repayment size | Compare the rate and term as well as the loan type. |
| Flexibility with the vehicle | Check the secured loan's vehicle and security conditions. |
What should you check before signing?
Before entering a car finance agreement, read the disclosure statement and credit contract carefully. New Zealand lenders must disclose important information including the interest rate, fees, repayments and any security interests. Make sure you understand which assets secure the loan and what can happen if repayments are missed.
Compare car loan options
Whether secured or unsecured finance is more suitable depends on the options available and your circumstances. EveryLoan refers visitors to Simplify Finance, where applications, lender matching, credit decisions and funding are handled by Simplify Finance and its lender partners.
EveryLoan is not a lender. Compare the actual rate, fees, term, repayments, total cost and security conditions of the finance options available to you.
Frequently asked questions
A secured car loan uses an asset, commonly the vehicle being financed, as security for the debt. An unsecured loan does not require the vehicle to be listed as security.
Vehicle finance is commonly secured against the car, but unsecured borrowing can also potentially be used to purchase a vehicle. Check the specific credit contract to see whether security is being taken.
It can be. Secured loans can have lower interest rates because the lender has an asset as security, but actual rates and fees vary. Compare the total cost of the options available to you.
Potentially. If the vehicle is listed as security and you breach the credit contract, the lender may have repossession rights. New Zealand law sets requirements that must be followed before a vehicle can be repossessed.
An unsecured lender does not have a security interest in the vehicle simply because you used the borrowed money to buy it. Unpaid unsecured debt can still lead to debt collection and other enforcement processes.
A lender's security interest can restrict selling or transferring the vehicle while money remains owing. Contact the lender before selling a financed vehicle and find out what is required to settle the loan or release the security.
A security interest gives the lender rights in the vehicle under the credit contract, but it is not the same thing as the lender simply owning the car. Check your finance agreement to understand the security arrangements.
Compare the actual options available to you. Consider the interest rate, fees, repayment amount, total amount repayable, loan term and the consequences of providing security before deciding.