Taking out finance in order to purchase a car is a common form of borrowing. The two most applied for types of financing to purchase cars are car loans and personal loans. While similar in some respects, car loans and personal loans are distinctly different forms of finance. So, it is important to work out which one can get you more value for money.
This guide will explain the differences between these two loan types. It also includes a calculator to help you work out exactly how much money you can save by opting for one over the other.
What’s the difference between a car loan and a personal loan?
The exact terms of your financing will depend on your chosen lender and product, but you can generally expect to find the following features with each type of loan.
Car loans
These are dedicated loans designed to cover only the cost of a car and related expenses such as licensing and registration. Most, but not all, are secured loans.
Interest rates. Rates will usually be more competitive if your loan is secured. If you choose dealership finance, your rate will be noticeably lower (around 2%) but you’ll generally have to pay a balloon payment.*
Security. Car loans use the vehicle you’re borrowing money for as collateral. This means you can access lower rates, but if you default on the loan, the lender may be able to claim the car.
Application. You need to supply more information, specifically about the vehicle, when you apply. This can include the make, model and VIN/Chassis number.
Restrictions. There are various restrictions with car loans. For example, you may not be able to buy a used car with the loan, depending on its age.
Personal loans
Personal loans are considerably more flexible. You can also shop around to find terms and conditions that may be preferable for you.
Use of funds. You can generally use the approved funds for any purpose you have, including purchasing a car. You can even use part of the loan amount to purchase the car and another part for a different purpose.
Application. You need to list the purpose of the loan, but this can be quite general. For the purchase of a car, simply listing "large purchase" as a reason may be sufficient.
Essentially, you could think of car loans as “pre-made packages”, while personal loans are more flexible and can be tailored to your needs.
*What's a balloon payment?
A balloon payment is made at the end of the loan term, and it is a single lump sum payment that pays off the rest of the loan. Balloon payments can be both advantageous (saving you money in interest) and disadvantageous (too hard on your budget), depending on your personal circumstances.
Which is better, a car loan or a personal loan?
Whether a car loan or a personal loan is better will depend on your personal situation. The pros and cons outlined above will affect different people differently.
For example, a personal loan might be better for you if you:
Are buying an older car that may not qualify as loan security
Decide that you want a bit of extra cash to use for another purpose
Have excellent credit and can secure a competitive personal loan
A car loan might be preferable if you:
Don't want to spend as much money over the life of the loan
Are looking to buy a new, or newer model of car
Haven't got a perfect credit history
Questions to ask yourself before submitting a loan application
If you're wondering what you should ask yourself before you click "submit" on that loan application, we've got a few handy tips that will help.
Are you expecting your financial situation to change?
If you’re anticipating a change in your financial situation in the near future, there’s a good chance a personal loan is preferable for you. An unsecured loan may carry less risk in an uncertain future and if you opt for variable rates, you’ll likely be able to take advantage of additional repayments without penalty.
Do you know what car you want to buy?
Pre-approval is generally only available with car loans. This means that if you want to shop for a car knowing how much you have to spend, you may want to opt for a car loan.
Are you buying a used car?
Buying used instead of new can be an effective way of saving money, but depending on the vehicle, you might not be able to find a car loan. So, you'll should possibly go for a personal loan instead. For example, some car loans will require the vehicle to be less than two years old, while personal loans will not have any such restrictions.
Do you have bad credit?
Bad credit car loans are available, but you’ll find more options with a bad credit personal loan.
Do you want to detail your car?
It can be costly to make modifications to your vehicle. Whether it’s just a new coat of paint or as extensive as changing the body of the car, many car lenders will not let you add this cost onto your loan. With a personal loan, you can borrow however much you like for different purposes. And you can add the cost of modifications onto the loan amount yourself.
At the end of the day, the most effective way to compare loans is by looking at specific options side by side. It can be a good idea to use a calculator to work out value for money more precisely.
Compare car loans and personal loans
For more information on any of these loans, simply click "More Info" to be taken to our review page. To apply for a loan, click "Go to site".
Step-by-step guide to finding the right type of loan
You might try the following steps to find a loan that works for you. Note that everyone’s circumstances are different and these steps may be considered guidelines. First and foremost, you should always look at the full terms and conditions of each loan you're considering when questioning whether it's right for you. This is because not all car loans are alike, and the terms of personal loans can vary widely.
Compare both
If you are already certain whether a car loan or personal loan is right for you, then you can only compare those types of financing. If you’re unsure, it can be a good idea to compare both car and personal loans using the steps below.
Head to finder.com.au to compare different loans and assemble a list of likely options.
Go through the car loan and personal loan options in the table above
Enter the interest rate, fees and terms into the calculator below to see which one is more affordable.
Adjust the terms to see if you can save on either option.
Decide which loan is more affordable.
What to remember
Remember that you have the freedom to compare options until you've found the right one for you, and that the first option you see might not necessarily be the best one for your circumstances. If you have found a car loan, or a personal loan that you wish to apply for on site, you can simply click "Go to Site" to find out more about how to apply.
Frequently asked questions about car loans vs personal loans
Here are some questions we have been asked about car loans and personal loans:
What should I know about used car loans?
Used car loans may carry higher interest rates to compensate for the reduced value of the vehicle over time, and there will be restrictions on the age of the car.
Can I use the loan for non-vehicle expenses?
Car loans are for cars only, while personal loans may be spent at your discretion. Consider the cost of car insurance, licensing and registration, fuel, maintenance, repairs and related costs as well as the price tag of the vehicle itself.
Will I need to provide details of the vehicle for a personal loan?
No. It’s standard practice for lenders to ask about the purpose of the personal loan, but no specific vehicle details will need to be supplied unless you apply for a car loan. Image: Shutterstock
Elizabeth Barry is the lead editor for Finder. She has over 10 years' experience writing about a range of topics with a focus on personal finance. You’ll find her writing and commentary in a range of publications and media including Seven News, the ABC, MSN, the Irish Times and Singapore Business Review.
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Finding the right car loan shouldn't be as hard as finding the right car. Get a loan that will give you pre-approval so you can go shopping with the right amount of funds.
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