Is a car loan better than a personal loan?

25 Jun 2021

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You’re shopping around for a new car, but not sure whether to get a ‘car loan’ or a ‘personal loan’ - which is best for you?

If you want to get technical, a car loan is basically a type of personal loan, just designed to be used for a car. For all intents and purposes, the general definition of a ‘car loan’ means it’s secured, meaning the loan is secured against your asset, while a personal loan can either be secured or unsecured. We’ll go into the pros and cons later, but long story short, it can affect your interest rate. So, which option is better for your next car purchase?

Car Loans vs Personal Loans - Pros & Cons

Most of the debate comes down to whether the loan is secured or unsecured, which affects your interest rate, and ultimately how much you pay.

Pros of Car Loans

  • Lower interest rates: A secured car loan can attract a lower interest rate because the loan is secured against the vehicle. This means that if you default on payments, debt collectors can seize your vehicle.

  • A wide variety of reputable lenders: Many financial institutions offer secured car loans. At carloans.com.au we source competitive rates from nearly 30 lenders to find the best car loan for you.

  • Can borrow a larger sum: As the car loan is secured, some lenders could offer loans as large as $100,000, which can go a long way in financing your next car purchase.

Cons of Car Loans

  • Usually have more restrictions on type of car: Many secured car loans, even ones for used vehicles, have a maximum age limit of about 12 years. This means that the maximum age of your vehicle while encumbered (under finance) is 12 years. For example, if you have a five year car loan, your maximum car age at time of taking out the loan would be seven years.

Pros of Personal Loans

  • Could work better for older cars: If you’ve got a classic car or some other type of vintage car, a personal loan could be more flexible in this regard. However, be sure to check the terms and conditions.

Cons of Personal Loans

  • Higher interest rate: Personal loans, especially when unsecured, usually have much higher interest rates than secured car loans. It’s not uncommon for an unsecured car loan’s rate to be double that of a secured rate, depending on the lender, as well as a borrower’s credit history.

  • Smaller sums of money: Depending on the purpose of the loan, and whether it’s secured or unsecured, a personal loan might have a maximum limit of only $10,000. This doesn’t get you very far in the car buying stakes.

Comparing Car Loans and Personal Loans

No matter which type of loan you decide to go for, a few certain points apply to both. When comparing the two, it’s important to check these items:

  • The interest rate: We’re seeing record-low interest rates on secured car loans, sometimes under 4% p.a. However, your interest rate is usually contingent on your credit history.

  • Fixed or variable: Fixed car loans are popular for repayment certainty, though variable loans could have a more attractive interest rate. Just know that variable means the rate can go up AND down.

  • Maximum loan amount: Some personal loans are limited to sizes of around $10,000 to $50,000, while secured car loans can feature up to around $100,000 limits.

  • Loan length: Personal loans can have loan lengths as short as six months, or as long as 5-7 years. Most popular secured car loans have minimum lengths around three years, up to seven years.

  • Fees: Certain fees to lookout for include establishment fees, monthly account keeping fees, and early discharge fees.

  • Balloon payment: Some of the most attractive interest rates come with loans featuring balloon payments, which is a lump sum you pay at the end of your loan term. A 30% balloon payment is not uncommon, so be sure to check this before signing up, and find out if such a payment works for you.

  • Flexibility: Certain car loans allow the borrower to pay extra into their car loan repayment every week, fortnight or month. This can ultimately lower the amount of interest paid, and shorten your loan term. However, some car loans limit this activity.

If you’re ready for a new set of wheels, speak with one of our car loan specialists today to get started on your journey.

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