14% of Australians have taken out a car loan according to Finder's Consumer Sentiment Tracker, but how does that compare to using a personal loan to purchase your car?
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?
Depending on the loan you take out, you may have the option of making a balloon payment when the loan ends. A balloon payment is a single lump sum payment that pays off the rest of the loan. These can help you save money on interest, but they also require you to pay a big sum of money at the end so can be harder on the budget. Not every loan or product offers this, and you should be sure to check if your loan automatically comes with a balloon payment so that you're not caught out. We've included an example of a balloon payment further down, or you can read more about it here.
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.
Car Loan
Personal Loan
Don't want to spend as much money over the life of the loan
Are buying an older car that may not qualify as loan security
Are looking to buy a new, or newer model of car
Decide that you want a bit of extra cash to use for another purpose
Haven't got a perfect credit history
Have excellent credit and can secure a competitive personal loan
Charlotte knows she wants to buy a car but she's not sure what one yet. To keep costs down, it'll probably be a used car. She wants to get the funds sorted first though.
Her best option is an unsecured personal loan, which doesn't require her to use the car as security. It also won't have any conditions on the age of the car like a car loan would.
She takes out a $20,000 personal loan and is approved for an 8% interest rate. Her loan term is 5 years and with a $10 monthly fee, she'll be paying $416 per month.
Charlotte ends up buying a car for $15,000, but because it's a used car it could use some love. But good news, she can use what's left of her personal loan on repairs and upgrades.
Chris has been shopping around for a new car and has found the perfect one! He applies for a $30,000 car loan, which is secured against his car so he knows that if he misses repayments he could end up losing the car.
He gets a 9% interest rate to pay off over 5 years. This could work out as $623 per month, but he opts for a loan with a balloon payment.
He chooses to make a final lump sum balloon payment of $5,000, so he only makes repayments towards $25,000. His monthly repayments are now $519 a month instead.
His total loan repayments end up being $36,138 rather than $37,366.
* This is a fictional, but realistic, example.
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, you might try asking yourself these questions first.
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.
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".
We currently don't have that product, but here are others to consider:
How we picked these
Finder Score for car loans
To make comparing car loans even easier we came up with the Finder Score. Interest rates, fees and features across 200+ car loan products and 100+ lenders are all weighted and scaled to produce a score out of 10. The higher the score, the more competitive the product.
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How we picked these
Frequently asked questions about car loans vs personal loans
One of the disadvantages of buying a car with a personal loan is that interest rates might be higher, because you're not securing the loan against the car you're purchasing.
You're also in danger of borrowing more than you need and putting yourself further in debt when you might not have needed the amount you borrowed.
Another disadvantage is that a personal loan might need a little more planning. Whereas some car loan providers will arrange the finance for you while you are in the dealership.
The lower the interest rate the cheaper the car loan. However, the lowest interest rate doesn't always mean the cheapest loan. If a loan comes with high fees, you could find yourself paying more than if you had gone with a slightly higher rate.
It's also hard to call out the cheapest loan when interest rates can fluctuate. One lender's rates can vary from between 6% to 24%, so the cheapest loan for one person might not be the cheapest loan for another.
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.
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.
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.
Elizabeth Barry is an experienced journalist with over 10 years of expertise in personal finance, contributing to outlets like the ABC, Sydney Morning Herald, and 7News. She holds a Master of Arts in Creative Writing and a Bachelor of Arts in Communication from the University of Technology Sydney, and has earned multiple award nominations, including a Highly Commended recognition at the 2017 Lizzies. Elizabeth began her career at Finder in 2013, progressing through roles to become Lead Editor, where she oversaw a wide range of personal finance coverage until 2024.
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