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Personal loan vs Car loan

Written by

Shaun McGowan

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 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 vs car loans compared

Car loans and personal loans are similar finance products, with a few key differences. Primarily, car loans are used specifically to finance a vehicle, while personal loans allow you to use the funds for any number of reasons.

Personal loan vs car loan pros and cons

Personal LoansCar 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.

Is a personal loan better than a car loan?

Whether a car loan or a personal loan is better for you will depend entirely on your circumstances and what you want to achieve with the loan.

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.

What kind of car will get you the best loan with Money Matchmaker

When LVR makes a personal loan a better option than a car loan

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.


Car Loan

  • You only want to buy a car
  • Are looking to buy a new car (less than two years old)
  • You have a bad credit history
  • Want to make minimum repayments
How a car loan works

Personal Loan

  • You are buying a vehicle that doesn’t qualify as security
  • Want cash for other purchases and expenses
  • Have a good credit history
  • Want to pay the loan off early
Find your personal loan with Money Matchmaker

Features to look for in car loans and personal loans

  • Lower interest rate - if you plan to make the minimum repayments for the full term
  • Low fees - if you’re trying to find the cheapest loans available
  • Flexible repayments - if you want a loan that works for your income schedule
  • Extra repayments without fees - if you want to save on interest charges early
  • Early loan settlement without fees - if you want to repay the loan early
  • Redraw facility - if you plan to access further finance equal to your repayments

Choosing a loan that suits your needs

Comparing options and making the most suitable choice between a personal loan and a car loan can potentially save thousands of dollars in interest.

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.

Shop around for a personal loan and save thousands with Money Matchmaker

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About 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.

About the Author

Shaun McGowan from



Shaun McGowan

Shaun is the founder of 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 and Lend.