Is Car Loan Secured or Unsecured?

Published: 22 November 2023

Updated: 14 October 2025

Buying a car is exciting. But the cost? It turns overwhelming. That is why a car loan helps. However, before you borrow, it is important to know: Is car loan secured or unsecured? This becomes the most important detail. If you understand this, it can help you:

Make the right financial choice
Save money on interest
Avoid risks

Let us explain the fundamentals of secured and unsecured car loans and their differences. This way, you will get a fair share of knowledge about eligibility, risks, and also know which type might be right for you.

What is a Secured Car Loan?

This is the most common way to finance a vehicle. This is how it works:

The car you purchase is also the collateral for the loan.
In case you do not repay, the lender will take away your car to recover the money. They have the right to do it.

The interest rates in this type are generally lower than unsecured loans because of the security.

Those who offer secured car loans include:

Banks (most of them)
Credit unions
Car dealerships
Online lenders

They usually require a down payment, which reduces the loan amount and monthly payments. You repay the loan in fixed monthly instalments over a set period (usually 24–96 months).

Advantages of Secured Car Loans

Lower interest rates – Less risk for lenders means cheaper financing.
Accessible for more borrowers – Even with moderate credit scores.
Flexible repayment terms – Longer terms allow smaller monthly EMIs.

Risks to Consider

Repossession. If you default, the lender can take back your car.
Longer terms may cost more in interest. Extended repayment can add to the total interest paid.

What is an Unsecured Car Loan?

Technically, there is no standard “unsecured car loan.” You can use a personal loan to buy a car. A few things are important here:

No collateral is required, so the lender cannot repossess your car.
Interest rates are higher because the lender carries more risk.
Loan terms are usually shorter, so monthly payments are higher.

So, how will unsecured car loans work?

Banks, credit unions, or online lenders process personal loans for car purchase.
Creditworthiness, income, and debt-to-income ratio heavily decide the approval.
Lenders may report to credit bureaus, send your account to collections, or pursue legal action if you miss payments.

When Should You Consider an Unsecured Loan?

Unsecured car loans may make sense if:

You do not want your car as collateral.
You plan a large down payment and need to finance only a small portion.
You want flexibility in choosing a dealership or private seller without involving the lender.
You do not want extra insurance tied to lender requirements.

Secured vs Unsecured Car Loans: Complete Comparison

Feature	Secured Car Loan	Unsecured Car Loan (Personal Loan)	Pros	Cons
Collateral	Car itself	None	Lower interest due to collateral	Risk of repossession if payments are missed (secured)
Interest Rates	Lower (7.5%–9.5% p.a.)	Higher (10%–16% p.a.)	Cost-effective for borrowers	More expensive over the loan tenure (unsecured)
Loan Term	24–96 months	12–60 months	Flexible EMI options (longer term)	Shorter terms mean higher monthly EMI (unsecured)
Eligibility	A moderate to good credit score is acceptable	Typically requires good credit	Accessible to more borrowers	Stricter eligibility for unsecured loans
Down Payment	Usually required	Not required	Lower loan amount reduces interest	Need upfront payment (secured)
Risk if Payment is Missed	The lender can repossess the car	Lender reports missed payments, may take legal action	Secured loans encourage responsible repayment	Default affects a credit score and may involve legal action
Where to Get It	Banks, NBFCs, car dealerships, online lenders	Banks, credit unions, online lenders	Multiple options to choose from	Unsecured loans are less widely offered for large amounts

Choosing the Right Loan Type

Consider the following:

Your Credit Score

High credit score? You might qualify for an unsecured loan.
Average or low credit score? A secured loan is safer and easier to get.

Budget and Monthly EMI

Secured loans offer longer terms and lower EMIs.
Check affordability because unsecured loans have shorter terms and higher EMIs.

Risk Tolerance

Can you handle the possibility of your car being repossessed?
If not, consider an unsecured loan, understanding higher interest rates.

Loan Amount and Down Payment

Secured loans may require a down payment.
Unsecured loans usually do not, but you may need excellent credit for larger amounts.

Secured vs. Unsecured Car Loans for 5-Year Tenure

Bank	Loan Type	Interest Rate (p.a.)	Loan Amount	Estimated EMI	Total Interest	Total Repayment
SBI	Secured	7.50%*	₹5,00,000	₹9,900	₹94,000	₹5,94,000
HDFC Bank	Secured	8.55%*	₹5,00,000	₹10,050	₹1,02,000	₹6,02,000
ICICI Bank	Secured	9.15%*	₹5,00,000	₹10,200	₹1,08,000	₹6,08,000
Axis Bank	Secured	9.30%*	₹5,00,000	₹10,300	₹1,10,000	₹6,10,000
SBI	Unsecured	9.99%*	₹5,00,000	₹10,700	₹1,20,000	₹6,20,000
HDFC Bank	Unsecured	13.00%*	₹5,00,000	₹11,400	₹1,36,000	₹6,36,000
ICICI Bank	Unsecured	13.75%*	₹5,00,000	₹11,600	₹1,40,000	₹6,40,000
Axis Bank	Unsecured	14.00%*	₹5,00,000	₹11,800	₹1,44,000	₹6,44,000

*Note: Interest rates are indicative and subject to change based on the bank's policies and the borrower's profile.

Common Mistakes to Avoid While Taking a Car Loan

Here is what to watch out for, as a few common mistakes can cost you money or affect your credit score:

Mistake	Impact	Tip / How to Avoid	MyMudra Support
Missing EMI Payments	For secured loans, car repossession, and missed payments harm credit score	Set up automatic payments or calendar reminders	EMI reminders to avoid missed payments
Choosing a Loan Term That is Too Long	Longer EMIs may seem low, but the total interest increases	Choose a term that balances affordable EMI and total interest	Loan planning tools to select optimal tenure
Ignoring Hidden Fees	Extra costs from processing fees, prepayment penalties, or late fees	Read fine print; ask about all charges	Transparent fee breakdowns
Not Comparing Lenders	May miss lower rates, better terms, or special offers	Compare multiple banks, NBFCs, and online lenders	Loan comparison tools to pick the best deal
Overlooking Credit Score Impact	A low credit score leads to higher rates or rejection	Check and improve your credit score before applying	Guidance on credit score and eligibility
Skipping Down Payment Planning	Higher loan amount and EMIs if the down payment is not budgeted	Save a reasonable down payment upfront	EMI calculators to plan a monthly budget

Conclusion

So, now you know whether a car loan is secured or unsecured. Borrowing with or without collateral affects the entire process of loan taking. MyMudra is there to help you explore the best car loan options from multiple banks and NBFCs.

You are free to pick between secured and unsecured loan when buying a car. Our platform makes the process easy and transparent. Apply for your car loan today and drive home your dream car with confidence.

Also Read:
- How to Apply for a Car Loan?
- What is an Electric Vehicle Loan (Green Car Loan)?

Frequently Asked Questions

Q1. Can I get a car loan with poor credit? +

Secured loans are more flexible and can accommodate borrowers with average or slightly low credit scores.

Q2. Are interest rates lower for secured loans? +

Yes. Secured loans are slightly risky for lenders, so they generally offer lower interest rates than unsecured loans.

Q3. Can I use a personal loan to buy a car? +

Yes, that is an unsecured loan. You will not risk repossession, but interest rates are higher, and approval requires good credit.

Q4. How long are car loan terms? +

Secured loan term is 24 - 96 months, and unsecured loan term is 12 - 60 months.

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Anjali Singh Assistant Manager

Hey there, I'm Anjali Singh. With over 6 years of experience in finance, I specialize in creating content on banking, loans, and financial planning. My goal is to simplify complex financial topics and help readers make informed decisions through my articles.