How to Use Your Car as Security for a Loan with Bad Credit
Key Takeaways
Higher Approval & Better Rates: Using your car as security reduces the lender's risk, making it easier to get approved with bad credit and often results in lower interest rates than unsecured loans.
Main Risk is Repossession: The biggest risk is that if you fail to make your repayments, the lender has the legal right to repossess and sell your car to recover their money.
You Keep the Car: You can continue to drive your vehicle as normal during the loan period. The lender simply registers a security interest against your car on the government's Personal Property Securities Register (PPSR) instead of taking your title.
Ownership is Required: Lenders require evidence that you fully own the car and that it is registered in your name with no existing finance attached to it.
Comprehensive Insurance is Mandatory: You will generally be required to have comprehensive insurance on the vehicle to protect the lender’s interest in case of an accident.
If you have bad credit but own a car, using it as security for a personal loan can be a practical way to access funds quickly. Secured personal loans use your car as collateral, giving lenders confidence to approve your application despite a poor credit history. This approach can help you access funds at lower interest rates than unsecured options and may allow you to borrow larger amounts. However, using your car as security comes with responsibilities, so it is important to understand the process, eligibility requirements, and risks before committing.
How It Works in Australia
You Keep Your Car: You can continue to drive your vehicle as normal during the loan period.
No Title Transfer: Unlike a US-style "title loan," you don't hand over your car's title. Instead, the lender registers a security interest against your car on the government's Personal Property Securities Register (PPSR).
The Main Risk: The biggest risk is that if you fail to make your repayments, the lender has the legal right to repossess and sell the vehicle to recover their money.
What is a Secured Personal Loan?
A secured personal loan is a type of loan where you pledge an asset as collateral, such as your car, to guarantee repayment. The collateral reduces the lender’s risk, making it easier for people with poor credit to obtain financing. Secured loans can be used for various purposes, including debt consolidation, major purchases, or covering emergency expenses.
These loans typically offer larger borrowing limits and lower interest rates than unsecured loans. However, failure to repay can result in the loss of the pledged asset, which makes it essential to assess your repayment capacity before applying.
Related Read: A Comprehensive Guide to Large Personal Loans for Australians from $5,001 to $15,000
Understanding Collateral: How Using an Asset Reduces Lender Risk
Collateral is a valuable asset that guarantees the lender can recover their money if you default. When your car is used as collateral, the lender has a tangible asset they can repossess and sell to recover outstanding debt.
Because the lender’s risk is reduced, they are often more willing to approve loans to borrowers with bad credit. Collateral also provides the possibility of better terms, such as lower interest rates or longer repayment periods.
Secured vs. Unsecured Loans for Bad Credit: A Quick Comparison
Feature | Secured Loan (Using Your Car) | Unsecured Loan |
Do you need to own an asset? | Yes, you must provide your car as security. | No, no security is needed. |
Which has lower interest rates? | This one. Rates are usually lower because the lender has less risk. | Not this one. Rates are higher to cover the lender's risk. |
Is it easier to get with bad credit? | Yes. Approval is more likely because your car guarantees the loan. | No. Approval is much harder and relies heavily on a good credit score. |
What is the biggest risk for you? | Losing your car. If you can't repay the loan, the lender can repossess your vehicle. | Damaging your financial future. Defaulting leads to severe credit score damage and potential legal action. |
Secured loans use collateral, whereas unsecured loans do not. Lenders view unsecured loans as higher risk, so interest rates are generally higher, and approval is more difficult for people with poor credit.
With a secured loan, using your car as security increases the likelihood of approval and can reduce costs. The main trade-off is that defaulting on the loan may result in the repossession of your car. Unsecured loans offer no such risk to assets but often come with higher fees and stricter approval criteria.
📢Need help finding a loan? Apply through Friendly Finance and we’ll do the heavy lifting for you! Simply fill in one application form, and we’ll search our network for a lender match that has a high chance of approving your loan.
How Do Loans Using a Car as Security Work?
When you use your car as collateral, the lender places a security interest or lien on the vehicle, which is officially recorded on the Australian Government's Personal Property Securities Register (PPSR). You can usually continue driving the car, but the lender retains the legal right to repossess it if repayments are not met.
The loan amount is based on your car’s current market value, your credit history, and your ability to make repayments. Most lenders will lend only a portion of the car’s value to ensure they can recover their funds if they need to sell the vehicle.
Secured car loans can be flexible in terms of repayment periods, but interest rates, fees, and eligibility criteria vary between lenders. Understanding all terms before committing is critical.
The Step-by-Step Application Process
Applying for a secured personal loan with your car involves several clear steps:
Research Lenders. Identify lenders that specialise in secured loans for bad credit. Compare interest rates, fees, loan amounts, and repayment terms.
Assess Your Car’s Value. Use tools such as RedBook or consult dealerships to determine the fair market value of your car. Lenders will base your loan amount on this assessment.
Prepare Documentation. Gather proof of ownership, insurance, registration, income statements, and bank statements. Completed documents speed up approval.
Submit Your Application – Provide accurate information on your finances and credit history. Full disclosure avoids delays or rejection.
Lender Assessment. The lender reviews your credit history, repayment capacity, and car value. They may request additional information or clarification.
Receive Loan Offer. The lender provides an offer detailing the loan amount, interest rate, fees, and repayment schedule. Read carefully before signing.
Finalise Loan and Register Collateral. After signing, the loan is settled, and the lender registers a security interest on your car. You retain use of the vehicle while repaying the loan.
⏰Crunched on time and need a loan now? Fill in our quick application form and we’ll find you a loan. It’s fast, it’s easy, and it will not hurt your credit score.
How Lenders Determine Your Car's Value
Lenders determine the value of your car by considering its make, model, age, condition, mileage, and any modifications. Online guides like RedBook provide benchmarks for typical market values.
Most lenders lend only a percentage of your car’s assessed value to protect themselves in case repossession is necessary. Cars with higher mileage, poor maintenance, or visible damage may result in lower borrowing limits. It is advisable to have a realistic estimate of your car’s value before applying.
What Happens to the Title of Your Car?
When a car is used as collateral, the title generally remains in your name. The lender will register a security interest or lien on the vehicle, giving them a legal claim to it if repayments are not met.
You can continue driving the car, renew registration, and maintain insurance, but the lender has priority over the car in the event of default. Once the loan is fully repaid, the security interest is removed, and full control of the car is restored.
The Pros and Cons of Using Your Car as Collateral
Benefit: Higher Chance of Approval with Bad Credit
A secured loan increases approval odds because the car reduces the lender’s risk. Even with poor credit or past defaults, lenders may be willing to offer funding.
Benefit: Potentially Lower Interest Rates Than Unsecured Options
Secured loans typically have lower interest rates compared to unsecured personal loans. This can reduce monthly repayments and overall interest costs.
Major Risk: What Happens if You Default on the Loan?
Defaulting can result in the repossession of your car. Losing your vehicle can disrupt work, school, and daily life. It may also impact your credit further and make future borrowing more difficult.
Additional Considerations
Even with collateral, missed repayments, fees, or defaults can negatively affect your credit score. Only take a secured loan if you are confident in your ability to meet repayment obligations.
Are You Eligible? What Lenders Look For
Proof of Car Ownership (No Existing Finance)
Lenders require evidence that you fully own the car and the vehicle is registered in your name. Vehicles with existing loans or leases may not qualify unless the finance is cleared beforehand.
Car Age and Condition Requirements
Cars are usually required to be less than ten years old and in good working condition. Excessive wear, high mileage, or structural damage may reduce eligibility or borrowing limits.
Proving Your Ability to Repay the Loan
Even with a secured asset, lenders will assess your income, employment stability, and living expenses. Demonstrating consistent income and responsible budgeting increases your chance of approval.
Insurance Requirements
Comprehensive insurance is generally required to protect the lender’s interest. In case of an accident, insurance payouts are directed to the lender first to cover outstanding debt.
Frequently Asked Questions (FAQs)
How much money can I borrow against my car?
Most lenders offer between 50% and 70% of your car’s assessed value. The exact figure depends on the car's condition, age, and your financial situation.
Can I still drive my car during the loan period?
Yes. A security interest does not prevent you from driving or registering the car. However, you must maintain insurance and ensure it is in good condition, and that the vehicle is still registered to you as an owner..
What happens if my car is in an accident while it's being used as security?
You are required to have comprehensive insurance. If the car is damaged or written off, the insurance payout typically goes to the lender to cover the outstanding loan. You remain responsible for any shortfall. It is advisable for you to check against the specific terms of your loan agreement especially since different lenders may have varying clauses.
Ready to apply for a loan? Get it through Friendly Finance. With just one application form, we’ll help you source the best lender match for you in the market. Apply now!
