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?
What's the difference between a personal loan and a secured car loan?
The main differences between personal loans and secured car loans are that a personal loan can be used for many different purposes whereas a secured car loan is for the purpose of purchasing a vehicle.
The other main difference is that with a secured car loan, the lender has a financial interest over the vehicle being purchased by taking an encumbrance over that car that would be shown on a public register.
Secured car loans are lower risk for lenders
Due to the fact the lender has a financial interest over the vehicle, a secured car loan is deemed a lower risk lend, as if the loan is in default, the lender has legal right to repossess the vehicle, offering some security. Whereas with a personal loan, in most cases would be unsecured, therefore if the loan was in default, the lender can only chase the borrower for its outstanding debt.
As a secured car loan is lower risk for the lenders, this often can result in a substantially reduced car loan interest rate for the borrower and at times can save significant interest costs over the term of their loan.
Lending criteria is less strict for a secured car loan
As lenders use the vehicle as security over the loan, lending criteria can often be a lot easier to obtain a secured car loan as opposed to a personal loan. There may be options to reduce the lenders risk further on a secured car loan by requesting a deposit to reduce the amount financed against the security. If the lender was to repossess and sell the car, they could recoup all their costs without having any shortfall amount.
There are usually more secured car loan options
There may not be as many options for personal loans as there are for secured car loans, especially via car loan brokers. Trying to match you with the right lender for a personal loan could be more difficult than finding a good fit for a car loan, depending on the lender and their lending criteria. Secured car loans are much more common than personal loans when buying a new car, as the lending criteria is generally more flexible as the vehicle is being taken as security against the loan.
In most cases it would be cheaper to take out a secured car loan, but not in all cases, so it is recommended to speak to a professional to assist with your decision making, so that you can weigh up all of your options.
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. Below you will find a list of pros and cons of each type of loan.
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, your lender has authority to repossess 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 $150,000, 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.
- Comparison Rate: The comparison rate shows the true cost of a loan, inclusive of the interest plus any expected fees and charges over the life of the loan. This makes the comparison rate a handy tool to use when comparing loans.
- 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, depending on movements in the market and fluctuations of your lenders' funding costs.
- 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 10% to 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 over the life of the loan, 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.