A lot of people mix up car loans and personal loans or think they’re the same thing.
In fact, a lot of lenders mix them up too. You’ll see ‘car loans’ advertised that are in fact personal loans. But they are different products. If you’re buying a car, knowing the difference matters.
In this article, I’ll explain the ins and outs of both car loans and personal loans, so you can decide which one to choose.
What’s the difference between a personal loan and car loan?
Car loans are essentially a type of personal loan. But they have some features that set them apart from other personal loans. The big one is security.
With a car loan, the vehicle you’re buying is used to secure the loan. This means the lender can reclaim the vehicle and sell it if you don’t repay the loan. This reduces risk for the lender.
A personal loan doesn’t require security, so they are seen as riskier. But they can be used for a much wider range of purposes.
Many of the other differences relate to the reduced risk of secured car loans.
Here’s an overview of the key factors when comparing a personal loan versus a car loan…
Personal loan vs car loan compared
Loan purpose | |
Personal Loans | Can be used for most expenses |
Car Loans | Only for new or newish vehicles |
Security required? | |
Personal Loans | No |
Car Loans | Yes |
Loan amount | |
Personal Loans | Up to $100,000 |
Car Loans | Up to $150,000 |
Term | |
Personal Loans | 1-7 years |
Car Loans | 1-7 years |
Repayments | |
Personal Loans | Weekly, fortnightly or monthly |
Car Loans | Weekly, fortnightly or monthly |
Interest rates | |
Personal Loans | Starting from 6-7% |
Car Loans | Starting from 5-6% |
Interest rate type | |
Personal Loans | Fixed or variable |
Car Loans | Usually fixed |
Early repayment | |
Personal Loans | Yes |
Car Loans | Yes but fees may apply |
| Personal Loans | Car Loans | |
|---|---|---|
Loan purpose | Can be used for most expenses | Only for new or newish vehicles |
Security required? | No | Yes |
Loan amount | Up to $100,000 | Up to $150,000 |
Term | 1-7 years | 1-7 years |
Repayments | Weekly, fortnightly or monthly | Weekly, fortnightly or monthly |
Interest rates | Starting from 6-7% | Starting from 5-6% |
Interest rate type | Fixed or variable | Usually fixed |
Early repayment | Yes | Yes but fees may apply |
Pros and cons of personal loans
Pros
- More flexibility on how to spend the loan funds (e.g an older or more unusual car)
- Security is not required
- Fixed or variables rates usually available
- Early repayments generally allowed
Cons
- Usually a higher interest rate
- This can make them considerably more expensive overall
- Rates can be particularly high for bad credit borrowers and people with an irregular income
Pros and cons of car loans
Pros
- Lower interest rates typically
- More options for borrowers looking for a bad credit car loan or low doc car loan
- You can apply for car loan pre-approval
- Option of having a balloon payment or taking out the loan through a novated lease
Cons
- You’re more restricted on what you can spend the money on
- Usually only fixed rates available
- There may be more restrictions and fees for repaying the loan early
Is a personal loan better than a car loan?
Whether a car loan or a personal loan is better will depend on your circumstances and what you want to achieve with the loan.
Here's a summary of when the options may be suitable to help you make up your mind and choose with confidence.
When could a personal loan be better?
- If you’re buying a very old or non-standard vehicle that isn’t eligible to be used as security.
- Similarly, if you want the loan funds to be able to cover other costs (like upgrades or modifications to the vehicle), this may only be possible with a personal loan.
- Research from Money.com.au shows that excluding car loans, personal loans are most often used for debt consolidation (54%), financing a home improvement (17%), and covering holiday costs (4%).
When could a car loan be better?
- If you want car finance for a new or fairly new vehicle and don’t need the loan to cover other costs (i.e. a maximum car loan LVR of 100%), a car loan will generally be a cheaper option. Particularly if you can find a car loan that offers flexibility on making extra repayments without penalty.
- A car loan, where the vehicle is used as security, may also reduce the risk in lenders’ eyes if you have bad credit, or you’re self-employed and need a low doc loan.
- Money.com.au's borrower's data shows that the average car loan amount requested ($34,282) is $16,000 more than the average personal loan amount requested ($18,169).
- Remember, there are also secured options for other vehicle types, like motorcycle loans, caravan loans and even boat loans.
Features to look for in car loans and personal loans
Whether you decide to go with a personal loan or a car loan, you should generally be looking at similar factors when comparing loans from different providers.
The main ones are summarised below.
Lowest interest rate
that you're eligible for - this will be based on your credit score and other factors
Lowest fees
you can find
Flexible repayments
if you want a loan that fits your income schedule
Extra repayments without fees
if you want to save on interest charges
Early loan settlement without fees
if you want to completely repay the loan early
Redraw facility
if you need to withdraw any extra repayments you have made
Eligibility
make sure you will actually be able to get your loan application approved
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