Unsecured VS Secured Loans – who comes out on top?
When it comes to financing a car purchase, consumers have many options from personal loans, leasing, drawing on your home loan or utilizing dealer finance directly through the car yard, each with their own benefits.
Personal loans are available for those wanting to borrow money to finance something they don’t have the funds for upfront. This could be for a holiday, study, renovations or to purchase a car.
Dealer Finance Specials:
No-interest or low-interest car loans are the latest tactic from car manufacturers desperate for sales. When a car dealer offers you money for nothing, there must be a catch – right?
Interest rates for new-car loans are typically 2 per cent or more, higher than mortgage interest rates.
If dealers are not charging interest on their finance packages, they need to make up the difference in other ways. For starters, the price of a vehicle with a special low- or no-interest deal is often non-negotiable.
The low-interest loans offered by dealers are typically only offered for limited terms, such as three years. To pay off a vehicle over that time requires larger repayments that can stretch household budgets, so buyers often opt for a residual, or balloon payment at the end of the loan.
You can make the balloon payment in cash, take out another loan at prevailing market rates, or sell the car. If you opt to roll over into another loan, some dealers will contract this into the original deal at a rate that may not be the best on offer.
Some dealers also offer a future trade-in at a guaranteed price. On the surface, this gives buyers peace of mind, but it doesn’t come cheaply. There were also various restrictions that increased the probability that the customer would not qualify for the buy back when the time came.
Customers on a limited budget may be better off buying a used car with a personal loan or secured car loan.
Secured Car Loan:
A secured loan requires you to use a new or used car as collateral to secure the loan, similar to the way in which a person’s home loan may be secured by their house. That means that if for some reason you can’t make your repayments, you might have to give up your car to help cover the outstanding balance on the loan and avoid a default. However, because you are willing to provide this security, you are generally rewarded with a lower interest rate.
You will generally find fixed rates instead of variable rates when it comes to car loans. The benefits of a fixed rate include that you have the ability to budget with an assurance that the rate will not change for the length of your loan.
Unsecured Car Loan:
An unsecured loan is not secured by your car, however, as there is a legal obligation to repay the loan, if you can’t meet your required repayments and don’t have any other way of repaying the loan, a default could adversely impact your credit rating.
A personal loan allows you to borrow for a wider variety of purposes, while car loans are usually restricted to only motor vehicles. You can use a personal loan for things like financing a holiday, a car, home renovations, vehicle repairs or consolidating your debts..
Redrawing on Mortgage:
If you’re ahead on your mortgage repayments then you might have accumulated a ‘nest egg’ you can redraw to fund buying a car. There are both positives and negatives to consider before doing this.
The convenience of having one regular loan repayment to manage can be appealing for consumers who redraw funds from their mortgage for their next vehicle purchase. Redraws can be organized very quickly – you won’t need to verify your income or obtain a credit check.
While the interest rate may be lower, the size of the debt and the effect of compound interest over time, meaning you pay more total interest by financing your car through your mortgage. A typical example of this was when a customer bought a small car for his daughter for a total of $20000. His outstanding Mortgage amount was $200000 and had 15 years left to pay it off. We calculated that he would have paid over $18000 interest over the rest of his Mortgage until we spoke to him and he financed the car away from his mortgage. We saved him over $12000 interest which he was very grateful about.
Leasing typically costs you more than an equivalent loan, in part because of the high finance charges. Once you’re in the leasing habit, monthly payments go on forever.
You have a limited number of kilometers in your lease contract each year. If you drive more than the restriction, you’ll have to pay an excess mileage penalty for every additional kilometer travelled. On the other hand, if you drive too little, you don’t get credit for the unused miles.
You must maintain the vehicle in good condition, or you’ll have to pay excess wear-and-tear charges when you turn it in. So, if your kids are apt to turn the interior into a finger-painting studio or your car’s a magnet for parking lot dents and dings, be prepared to pay extra.
If you need to get out of a lease before it expires, you may be stuck with thousands of dollars in early-termination fees and penalties—all due at once. This could equal the amount it would cost had you stuck with the lease for its entire term.
You aren’t allowed to customize your vehicle in any permanent way.