Personal loans and car loans are two of the most common personal finance options available when looking to finance a personal vehicle. However, these products are often so similar that people can be easily led into an unnecessary loan product, and receive an unsatisfactory experience as a result.
This can lead to higher repayments, longer time in debt, and potentially $1,000s wasted when there was a better option all along. Because of this, choosing the right loan product could save you $1,000s where others have failed.
If you’d like to see the best rate you can get approved for today, you can simply use the Money.com.au Smart Form. No obligation, no hidden fees, and only the best offers from Australian lenders, personalised to your needs.
Otherwise, read on to learn more about personal loans and car loans, and how understanding these very similar products can help you make the right choice when comparing your options.
|Personal Loans||Car Loans|
More options. A personal loan gives you more options. You can usually choose between a secured and unsecured loan, and a fixed or variable interest rate.
Only for vehicles. Generally, car loans can only be used to purchase a vehicle, with the vehicle used as security. That means if you default on the loan the lender may be able to seize your car.
Higher interest rate. Generally, secured personal loans have higher interest rates than car loans.
Lower interest rates. Car loans often have lower interest rates than secured personal loans.
More versatile. Use funds from a personal loan for any purpose, within reason. That includes consolidating debt, going on holiday, buying a car, renovating your home or covering unexpected expenses.
Fixed interest rates. Car loans usually have fixed interest rates, meaning the rate doesn’t change for the loan term. This provides certainty but is not as flexible as a variable rate.
Stricter credit policy. Lenders often consider personal loans to be riskier than a car loan. They often have stricter credit requirements, and your application may not be accepted if you have bad credit.
More information required. You will need to supply specific information about the vehicle when you apply for a car loan.
More restrictive. Car loans may have conditions on the type or age of the car you can buy.
If you only wish to finance the purchase of a vehicle and not use the funds for any other purpose (such as repaying debts or bills), you will generally benefit from a secured car loan over a personal loan.
The other factor you may need to consider when buying anything but a brand-new car is the LVR (Loan-to-Value Ratio) of your purchase.
LVR is the amount of money you borrow vs the value of the vehicle you are purchasing.
Lenders use LVR to determine the rates and other costs of your car loan. As a rule of thumb, an LVR of 100% can generally get you a decent deal, and anything higher may result in a much more expensive car loan.
If you’re buying a used vehicle, including extra costs in your loan such as customisation, or buying a car with a limited market for resale, chances are your LVR will be high.
You can reduce your LVR by making an upfront deposit.
Consider comparing personal loans and car loans to see if you qualify for both and which may present a better overall deal.
Personal loans tend to be more flexible, allowing you to purchase whatever you’d like with the approved funds, while car loans are generally only to be used to buy a vehicle and have lower rates.
Car loans often have fixed interest rates, which provide certainty but can be inflexible. Personal loans interest rates are often variable, which provide flexibility and may allow you to make extra repayments without incurring fees.
Ultimately, car loans and personal loans are just financial tools. It’s up to you to decide which tool will help you do the job, and which is best suited to your circumstances.
Money.com.au want to make managing money easy and fun! By giving Australians simple tools so they can make the best decisions they can about their money.
We understand that the world of finance is complex, and offer free, extensive guides on Personal Loans, Car Loans and Business Loans, along with tools like our Budget Planning Spreadsheet to help you better manage and understand personal finance.
Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.