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Car finance ›
Secured vs unsecured car loans
Updated: Tuesday, 13 February 2024
If you’re looking to spread the cost of buying a car using a loan, there are two main types to consider: secured and unsecured loans. The key difference between the two is that secured loans are secured against the car you’ll be buying, and unsecured loans are not. If you can’t keep up your monthly payments on a secured car loan, the lender may repossess your car.
The differences between secured and unsecured car loans
Our table below shows you the key differences between these two types of car loan. Every loan provider is different, so we can’t speak for everybody, but these are the key differences to help you understand which may be more appropriate for you:
Secured car loan
Secured car loans are generally less risky for a lender, and so you might find it easier to get one if you have bad credit or no credit history. The lender has the right to repossess the car if the monthly payments aren’t made, so it’s important to only apply for credit that you can afford. Let’s go through some of the key things about a secured car loan:
If you’re looking to spread the cost of buying a car using a loan, there are two main types to consider: secured and unsecured loans. The key difference between the two is that secured loans are secured against the car you’ll be buying, and unsecured loans are not. If you can’t keep up your monthly payments on a secured car loan, the lender may repossess your car.
The differences between secured and unsecured car loans
Our table below shows you the key differences between these two types of car loan. Every loan provider is different, so we can’t speak for everybody, but these are the key differences to help you understand which may be more appropriate for you:
Secured car loan
Secured car loans are generally less risky for a lender, and so you might find it easier to get one if you have bad credit or no credit history. The lender has the right to repossess the car if the monthly payments aren’t made, so it’s important to only apply for credit that you can afford. Let’s go through some of the key things about a secured car loan:
Potentially lower interest
Because the loan is secured against the car itself, you may find that you are offered a lower interest rate on a secured car loan than an unsecured one. However, the actual interest rate you are offered will depend on a wide range of factors, including your credit score, income, and any existing debts you have.
Longer approval process
With secured car loans, there is often more strict lending criteria. This is because the lender wants to be sure of the car’s value, in case the loan agreement is terminated and the car is ever repossessed. This means that the approval process may take slightly longer for a secured car loan than an unsecured car loan.
Potentially lower interest
Because the loan is secured against the car itself, you may find that you are offered a lower interest rate on a secured car loan than an unsecured one. However, the actual interest rate you are offered will depend on a wide range of factors, including your credit score, income, and any existing debts you have.
Longer approval process
With secured car loans, there is often more strict lending criteria. This is because the lender wants to be sure of the car’s value, in case the loan agreement is terminated and the car is ever repossessed. This means that the approval process may take slightly longer for a secured car loan than an unsecured car loan.
Types of secured loans
Generally, lenders offer secured loans when people are seeking to borrow larger sums of money. A mortgage is another example of a secured loan – the money you’re borrowing is secured against the value of your house.
Unsecured car loan
Unsecured car loans are when you borrow money from a lender, which you can then use to buy a car of your choice. They’re based on your creditworthiness. This means the lender is looking at factors such as your credit score, credit history, and financial circumstances to decide whether you’re eligible.
Let’s explore the key points behind unsecured car loans in more detail:
Types of secured loans
Generally, lenders offer secured loans when people are seeking to borrow larger sums of money. A mortgage is another example of a secured loan – the money you’re borrowing is secured against the value of your house.
Unsecured car loan
Unsecured car loans are when you borrow money from a lender, which you can then use to buy a car of your choice. They’re based on your creditworthiness. This means the lender is looking at factors such as your credit score, credit history, and financial circumstances to decide whether you’re eligible.
Let’s explore the key points behind unsecured car loans in more detail:
Potentially higher interest
Since the loan isn’t secured against an asset (a car or house), unsecured car loans tend to come with a higher interest rate. If you then fail to keep up your loan payments, the lender may take legal action to recover the money owed.
Affordability checks
Before accepting your application, lenders will run detailed credit and affordability checks to ensure you can comfortably and reliably meet the terms of your repayment schedule. If you have a good credit score, then your likelihood of being approved for an unsecured loan is higher, though some specialist lenders will offer unsecured loans with higher interest rates to people with bad credit histories.
Limited borrowing amounts
Because there is more risk to a lender in an unsecured car loan, they might limit the amount you can borrow. If we take the example of credit cards, banks may offer a lower credit limit to someone with a lower credit score since they pose a greater risk.
Potentially higher interest
Since the loan isn’t secured against an asset (a car or house), unsecured car loans tend to come with a higher interest rate. If you then fail to keep up your loan payments, the lender may take legal action to recover the money owed.
Affordability checks
Before accepting your application, lenders will run detailed credit and affordability checks to ensure you can comfortably and reliably meet the terms of your repayment schedule. If you have a good credit score, then your likelihood of being approved for an unsecured loan is higher, though some specialist lenders will offer unsecured loans with higher interest rates to people with bad credit histories.
Limited borrowing amounts
Because there is more risk to a lender in an unsecured car loan, they might limit the amount you can borrow. If we take the example of credit cards, banks may offer a lower credit limit to someone with a lower credit score since they pose a greater risk.
Types of unsecured loans
Since the lender typically takes on more risk when offering an unsecured loan, the amount they’re willing to lend is usually less. As well as unsecured car loans, unsecured loans are more common for things like:
- Credit cards
- Student loans
- Bank account overdrafts
- Borrowing money from a bank or building society to cover the costs of home improvements, buying a new car, or debt consolidation.
What to keep in mind when applying for car loans
Know your credit score
Your credit score can affect your chances of getting approved for a car loan and the interest rates you’ll be offered. Make sure you understand and check your credit score and know how it impacts your ability to get credit.
You can check your credit score using Experian, Equifax or TransUnion.
Monthly payments
Assess your budget. Consider not just immediate monthly payments but also long-term financial commitments. You may want to opt for a payment plan that comfortably fits your situation and allows you to repay the loan without getting into difficulties.
Interest rates
As interest rates change, it’s important to be aware that even seemingly small changes in rates can sometimes have a significant effect on your overall repayment amount. It’s important to understand whether your car loan has a fixed or variable interest rate, so that you know whether your monthly payments might change or stay the same throughout the loan duration.
Secured and unsecured loans
When shopping for a car loan, make sure to compare the difference between a secured and unsecured loan. Start by weighing out the pros and cons of each; look at the loan type, repayment period, interest rates and your own affordability to determine what works best for you.
Consider loans and finance
An unsecured personal loan used to buy a car and car finance are very similar but aren’t necessarily the same. As we explained earlier, an unsecured loan lets you borrow money to spend as you like. However, car finance is where you borrow money and the finance company pays the dealership for you.
If that sounds interesting, why not check out our guide that explores the differences between car finance and loans?
More from Moneybarn
At Moneybarn, we provide bad credit car finance, so if you have a poor credit history or have been previously rejected for finance, we could help.
It’s important to note that car finance is slightly different from secured or unsecured car loans. One key difference is that, with finance, we pay the dealership on your behalf. Once you’ve collected your new car, you’ll make monthly payments to us (your finance company) until the agreed amount is paid off.
We’re one of the UK’s largest car finance providers for people with bad credit. We have over 30 years of experience, so if you have a County Court Judgement, are looking for car finance while collecting benefits, or anything else, use our car finance calculator to see what your agreement could look like.
Representative 30.5% APR.
FAQs about secured and unsecured car loans
What are the consequences of not being able to pay a car loan?
Some potential consequences of failing to repay a secured or unsecured car loan include:
- Damage to credit score: missed or late payments are reported to credit reference agencies which can cause your credit score to drop. A poor credit score can make it difficult to borrow money in the future. You might find it more expensive to get loans, credit cards, or finance if you’ve missed payments in the past.
- Mounting debt: defaulting on credit may cause extra fees to be added to your agreement. This means you owe more to the lender, and this debt can spiral.
- Debt collection: The lender will likely escalate the matter by contacting you via telephone or letter. If you aren’t able to repay the debt, for secured car loans, the lender may repossess the vehicle. With unsecured car loans, the lender may pass the debt on to a debt collection agency.
- County Court Judgment (CCJ): if the debt remains unpaid, the lender may apply for a CCJ against you. A CCJ is a legal judgement that will stay on your credit report for six years. This can make it harder to get credit in the future.
Is it easier to get a secured car loan than an unsecured loan?
According to Money Saving Expert, borrowing money through a secured loan can sometimes be easier because the lender is able to repossess the car should the borrower be unable to pay.
If you have a limited credit history or a bad credit score, then applying for a secured car loan might be a good way for you to borrow money and improve your credit score in the process. Unsecured loans tend to be easier to get if you have a better credit history, but this isn’t always the case, as providers all have their own lending criteria.
All applications for loans, secured and unsecured, will involve credit checks, so it’s important to know your own credit score and understand the factors which can affect a credit score.
Do secured and unsecured loans both require credit checks?
Yes, UK lenders must carry out credit checks on anyone who makes an application for credit, be it a car loan or car finance. Lenders carry out two types of checks, soft credit checks and hard credit checks, so make sure you know which they do before making any applications.
If you’re still unsure, our guide explains why no credit check car finance is a myth and doesn’t exist.
Is it better to get a secured loan or an unsecured loan?
Neither type of loan is inherently better than the other. Whether you apply for a secured or unsecured car loan to help spread the cost depends on your personal circumstances. Everyone is different, and some types of credit suit some more than others.
You might also decide to think about whether car finance is suitable for your circumstances. If that’s the case, check out our guide that explains how financing a car works. It explores the different types of finance and the pros and cons of each, to help you make an informed decision.
Types of unsecured loans
Since the lender typically takes on more risk when offering an unsecured loan, the amount they’re willing to lend is usually less. As well as unsecured car loans, unsecured loans are more common for things like:
- Credit cards
- Student loans
- Bank account overdrafts
- Borrowing money from a bank or building society to cover the costs of home improvements, buying a new car, or debt consolidation.
What to keep in mind when applying for car loans
Know your credit score
Your credit score can affect your chances of getting approved for a car loan and the interest rates you’ll be offered. Make sure you understand and check your credit score and know how it impacts your ability to get credit.
You can check your credit score using Experian, Equifax or TransUnion.
Monthly payments
Assess your budget. Consider not just immediate monthly payments but also long-term financial commitments. You may want to opt for a payment plan that comfortably fits your situation and allows you to repay the loan without getting into difficulties.
Interest rates
As interest rates change, it’s important to be aware that even seemingly small changes in rates can sometimes have a significant effect on your overall repayment amount. It’s important to understand whether your car loan has a fixed or variable interest rate, so that you know whether your monthly payments might change or stay the same throughout the loan duration.
Secured and unsecured loans
When shopping for a car loan, make sure to compare the difference between a secured and unsecured loan. Start by weighing out the pros and cons of each; look at the loan type, repayment period, interest rates and your own affordability to determine what works best for you.
Consider loans and finance
Car loans and car finance are very similar but aren’t necessarily the same. As we explained earlier, an unsecured loan lets you borrow money to spend as you like. However, car finance is where you borrow money and the finance company pays the dealership for you.
If that sounds interesting, why not check out our guide that explores the differences between car finance and loans?
More from Moneybarn
At Moneybarn, we provide bad credit car finance, so if you have a poor credit history or have been previously rejected for finance, we could help.
It’s important to note that car finance is slightly different from secured or unsecured car loans. One key difference is that, with finance, we pay the dealership on your behalf. Once you’ve collected your new car, you’ll make monthly payments to us (your finance company) until the agreed amount is paid off.
We’re one of the UK’s largest car finance providers for people with bad credit. We have over 30 years of experience, so if you have a County Court Judgement, are looking for car finance while collecting benefits, or anything else, use our car finance calculator to see what your agreement could look like.
Representative 30.5% APR.
FAQs about secured and unsecured car loans
What are the consequences of not being able to pay a car loan?
Some potential consequences of failing to repay a secured or unsecured car loan include:
- Damage to credit score: missed or late payments are reported to credit reference agencies which can cause your credit score to drop. A poor credit score can make it difficult to borrow money in the future. You might find it more expensive to get loans, credit cards, or finance if you’ve missed payments in the past.
- Mounting debt: defaulting on credit may cause extra fees to be added to your agreement. This means you owe more to the lender, and this debt can spiral.
- Debt collection: The lender will likely escalate the matter by contacting you via telephone or letter. If you aren’t able to repay the debt, for secured car loans, the lender may repossess the vehicle. With unsecured car loans, the lender may pass the debt on to a debt collection agency.
- County Court Judgment (CCJ): if the debt remains unpaid, the lender may apply for a CCJ against you. A CCJ is a legal judgement that will stay on your credit report for six years. This can make it harder to get credit in the future.
Is it easier to get a secured car loan than an unsecured loan?
According to Money Saving Expert, borrowing money through a secured loan can sometimes be easier because the lender is able to repossess the car should the borrower be unable to pay.
If you have a limited credit history or a bad credit score, then applying for a secured car loan might be a good way for you to borrow money and improve your credit score in the process. Unsecured loans tend to be easier to get if you have a better credit history, but this isn’t always the case, as providers all have their own lending criteria.
All applications for loans, secured and unsecured, will involve credit checks, so it’s important to know your own credit score and understand the factors which can affect a credit score.
Do secured and unsecured loans both require credit checks?
Yes, UK lenders must carry out credit checks on anyone who makes an application for credit, be it a car loan or car finance. Lenders carry out two types of checks, soft credit checks and hard credit checks, so make sure you know which they do before making any applications.
If you’re still unsure, our guide explains why no credit check car finance is a myth and doesn’t exist.
Is it better to get a secured loan or an unsecured loan?
Neither type of loan is inherently better than the other. Whether you apply for a secured or unsecured car loan to help spread the cost depends on your personal circumstances. Everyone is different, and some types of credit suit some more than others.
You might also decide to think about whether car finance is suitable for your circumstances. If that’s the case, check out our guide that explains how financing a car works. It explores the different types of finance and the pros and cons of each, to help you make an informed decision.
For a better road ahead
Moneybarn is a member of the Finance and Leasing Association, the official trade organisation of the motor finance industry. The FLA promotes best practice in the motor finance industry for lending and leasing to consumers and businesses.
Moneybarn is the trading style of Moneybarn No. 1 Limited, a company registered in England and Wales with company number 04496573, and Moneybarn Limited, a company registered in England and Wales with company number 02766324. The registered address for these companies is: Athena House, Bedford Road, Petersfield, Hampshire, GU32 3LJ.
Moneybarn’s VAT registration number is 180 5559 52.
Moneybarn Limited is authorised and regulated by the Financial Conduct Authority (Financial Services reference No. 702781)
Moneybarn No. 1 Limited is authorised and regulated by the Financial Conduct Authority (Financial Services reference No. 702780)
