Quick answer
A secured loan uses an asset, usually a car, as security; the lender can repossess and sell it if you don't repay, and in return the loan usually costs less. An unsecured loan has no asset attached; it usually costs more and has lower limits, and if you default the lender takes legal action to recover the debt. Choose based on total cost, your purchase and your comfort with risk.
Key points
- Secured loans usually cost less because the lender holds an asset.
- With a secured car loan, the lender can repossess the car if you default.
- Unsecured loans usually cost more and have lower limits, but nothing is repossessed.
- A lender's security interest in a car is recorded on the PPSR until the loan is repaid.
The word “secured” sounds reassuring, as if it’s the safer choice for you. In lending it means the opposite: the loan is safer for the lender, because it has something it can sell if repayments stop. That’s not a reason to avoid secured loans. It’s a reason to understand exactly what you’re trading.
What’s the difference in one table?
| Secured loan | Unsecured loan | |
|---|---|---|
| Asset attached | Yes, usually the car you’re buying | No |
| Typical cost | Usually lower | Usually higher |
| Typical limits | Can be higher, linked to the asset’s value | Usually lower |
| If you default | Lender can repossess and sell the asset | Lender can take legal action to recover the debt |
| Selling the asset | Loan normally paid out first | No lender permission needed |
| Common uses | New and late-model used cars | Older cars, renovations, consolidation, emergencies |
Moneysmart summarises both sides: with a secured loan “you provide an asset, such as your car, as security”, while unsecured loans usually have higher rates and lower limits, and some lenders ask for a guarantor.
How does security work on a car?
When a car secures a loan, the lender registers its interest on the Personal Property Securities Register (PPSR). That registration stays until the loan is repaid, and anyone searching the car’s VIN can see finance is owing. It’s why a buyer of a used car should always run a PPSR search, and why you can’t simply sell a car that still secures a loan: the payout usually happens as part of the sale. Our PPSR guide explains the search from the buyer’s side.
What really happens if repayments stop?
This is the question that matters most, so it’s worth knowing the rules.
With a secured car loan, Moneysmart explains that a lender generally can’t repossess without a court order if you owe less than $10,000 or less than a quarter of the loan, whichever is lower. For larger debts, the lender generally has to show you’re behind, send you a notice giving you 30 days to catch up, and wait out those 30 days before repossessing.
With an unsecured loan, there’s nothing to repossess, but the lender can pursue the debt through legal action, and missed payments and defaults go on your credit report.
Either way, the best move is to act early. Ask your lender for a hardship variation the moment you see trouble coming, and call the free National Debt Helpline on 1800 007 007. Our guide to falling behind on repayments has the steps.
How do you decide which one to choose?
Ask yourself four questions:
- What am I buying? A newer car usually suits a secured loan. An older car, a renovation or a debt clean-up usually points to unsecured.
- What’s the total cost of each? Compare the total amount payable, not just the repayment. Moneysmart suggests comparing comparison rates only for the same amount and term.
- How would I feel if the asset were at risk? If losing the car would stop you getting to work, weigh that seriously.
- Do I want to sell or modify the asset freely? An unsecured loan leaves the car entirely yours.
Still undecided? The four-question car loan or personal loan quiz gives a quick steer. Then check the repayment against your comfortable budget, and when you’re ready, see your options before you commit.
Is it ever a bad idea to secure a loan?
It can be, particularly when turning unsecured debts into secured debt. Moneysmart’s consolidation guidance warns that securing debts such as credit cards against your home or car means the asset can be sold if you can’t repay. A lower cost doesn’t help if the stakes become too high. See debt consolidation loans for the four tests consolidation should pass.
For a renovation, an unsecured personal loan is common, and our home improvement loans page covers sizing the loan to the quotes.
What about guarantors?
Some lenders accept a guarantor in place of, or as well as, security. The guarantor agrees to repay if you can’t. Moneysmart’s advice is that both of you should understand the commitment, because it can put the guarantor’s own finances at risk.
How do the two compare on a typical purchase?
The examples below are illustrative only, with no real figures, to show how the choice plays out.
| Situation | Often worth looking at first | Why |
|---|---|---|
| Late-model used hatchback from a dealer | Secured car loan | The car holds value well and is likely to meet lender rules |
| Twenty-year-old 4WD from a private seller | Unsecured personal loan | Older vehicles may fall outside secured lenders’ age limits |
| Bathroom renovation | Unsecured personal loan | There’s no movable asset to secure the loan against |
| Several credit cards to clear | Unsecured, after the four consolidation tests | Securing old card debt raises the stakes |
| A car you plan to modify heavily | Unsecured personal loan | You keep full control of the car |
These are starting points, not rules. Your credit history, income and the lender’s policies all shape what’s actually available.
Pick the trade-off that suits you
Secured or unsecured, the right loan is the one whose total cost and risk you’re comfortable with, and whose repayment fits your budget. Start an application with our secure partner to see your options before you commit, and ask a real person if you’d like the trade-off explained for your situation. Please answer accurately about the purchase and your finances, so the options you see reflect the right kind of loan.
Frequently asked questions
What can be used as security for a personal loan?
Most commonly a car. Moneysmart gives the example of providing an asset, such as your car, as security. Some lenders accept other assets.
What happens if I can't repay a secured loan?
The lender can take and sell the security. For larger debts, the lender generally has to give you a notice with 30 days to catch up before repossessing, and court orders apply in some cases.
What happens if I can't repay an unsecured loan?
There's no asset to repossess, but Moneysmart notes the lender can take legal action to recover the money, and missed payments will appear on your credit report.
Can I sell a car that's security for a loan?
Not freely. The lender's interest is registered on the PPSR, so the loan usually has to be paid out before or at the sale.
Is unsecured better for an older car?
Often. Secured lenders may limit the age or type of car they'll accept, so an unsecured personal loan can be more practical for older vehicles.