Car Loans vs. Personal Loans – Understanding the Pros & Cons
For many, a car loan is the most suitable solution for getting the car they’ve always dreamed of. However, the decision to apply for a loan is the easy part – where people often get stuck is choosing which loan product to apply for.
To the uninitiated, the term ‘car loan’ applies to a single loan product that simply means a lender is going to give you the necessary funds to purchase a new car. However, when you are looking to finance a car, there are actually different options to choose from. And then comes the struggle to understand the difference between the two primary options – a personal loan, and a car loan – and which is going to provide the best solution.
Unfortunately, there’s no single product that is universally better than the others – some applicants are going to benefit most from a personal loan, and others are going to get the best deal with a car loan.
Understanding the differences between the different loans is crucial to make an informed decision that fits your specific circumstances, needs, and goals. Within this article, Credit One are going to break down the differences between a car loan vs. personal loan, and the pros and cons of each. By the end, you’ll have a clear idea of which loan will be best suited to your circumstances, and how to get out on the road with your new whip, sooner.
What’s the Difference Between a Car Loan vs. Personal Loan?
If you’re in the market to purchase a new car, the two most common financing options include a car loan and a personal loan. So – what’s the difference between the two? And does it matter which loan product you choose to get on the road?
In short, a personal loan is a loan provided by a lender to the borrower, which can be used to make a large purchase – whether it be a holiday, boat, or car. A car loan, on the other hand, is specifically designed to fund the purchase of a car.
Despite what most people think, a car loan is not a personal loan. Although you can use a personal loan to purchase a car, a car loan itself is specifically for the purchasing of vehicles and is a secured loan. A personal loan can be both a secured loan and an unsecured loan.
Confused? Fret not. If you’re looking to finance a car – both are viable options. The reason that you can choose between the two is that a personal loan may be more suitable to one buyer, and a specific car loan may be more appropriate to others. To summarise:
- A personal loan can be used for a variety of different purchases – whether it be a renovation, holiday, caravan, or other vehicle
- A personal loan can either be secured, or unsecured
- A car loan is a secured loan, which means that the lender will use the car as security for the loan
- The best loan option for you will come down to your personal financial circumstances, credit score, and goals
When you work with Credit One, your car loan broker will work with you to determine the most appropriate solution. However, for the sake of breaking it down on paper, let’s look at the specificities and pros and cons of each a car and personal loan:
Car Loan Pros & Cons
As mentioned above, a car loan is specifically designed to cover the costs of a new vehicle purchase. Car loans can also cover related expenses such as licensing and registration.
Pros of a Car Loan:
- Secured loan, which generally means that they are lower risk for the lender
- Secured by the car as collateral, making it easier to get approval by lenders
- Car loans will usually involve competitive interest rates
- The loan amount is specific to the car purchase and related costs, making it easier to budget
Cons of a Car Loan:
- Only applicable for the purchase of a car
- Will often require a balloon payment
- If you default on the loan, the lender may be able to repossess the car
- Some lenders will only provide a car loan for the purchase of a new car. It may prove difficult to get finance for a second hand or older vehicle with a car loan
How Much Can I Borrow with A Car Loan?
Car loans can vary depending on the car you plan to purchase. Car loan amounts can range from around $3,000, all the way up to $100,000. The borrowing amount will be directly linked to the car you’re purchasing. For example, if you’re looking to purchase a car valued at $45,000, the most you’ll be approved for is $45,000, however, you may choose to pay a deposit on the car and then borrow a smaller amount.
Personal Loan Pros & Cons
A personal loan is a more generalised type of finance that can be used to purchase your dream car.
Pros of a Personal Loan:
- Funds can be used for a variety of purposes – from a new car, to emergencies, to renovations, car accessories and more
- Can be unsecured or secured – unsecured means you do not need to put the asset up as collateral
- Can cover the costs of any modifications to car that you plan on making
- Less restrictions around the age and type of vehicle
- Loan amount can be adjusted according to your needs
Cons of a Personal Loan for a Car:
- Personal loans can come with higher interest rates
- Most commonly an unsecured loan, reducing likelihood of approval with less than perfect credit score
- Approval may be more dependent on credit score and financial circumstances
How Much Can I Borrow with A Personal Loan?
The beauty of a personal loan is that the borrowing amount is not strictly limited to what the lender values your new car to be worth. Personal loans can vary from $2,000 to $50,000, and even $100,000, depending on what you apply for. Approval for personal loan borrowing amounts will come down to your income, expenses, savings, any existing debts, credit score, loan purpose, and loan security.
It’s worth noting here that the pros and cons of a car loan vs. personal loan will vary enormously depending on the applicant, the lender, and the current market conditions (hence why we have kept it vague and general!). That’s why, when you’re ready to take the plunge and apply for a loan, it’s so important to weigh up your options, do your research, and work with a car loan broker to help you make the right decision for you and your new car.
Which Loan is Right for Me?
Car Loan Takeaways:
- A car loan may be preferable if you don’t want to spend as much money over the life of the loan
- A car loan may be preferable if you are in the market for a new, or newer model of car
- A car loan may be preferable if you do not have a perfect credit history
Personal Loan Takeaways:
- A personal loan may be preferable if you require some extra cash for additional purposes on top of a car
- A personal loan may be preferable if you are looking to purchase an older car
- A car loan may be preferable if you have a good credit score and can secure competitive rates as a result
Questions to Ask Yourself:
Ok – so you’ve now got the complete run down on car loans vs personal loans. Struggling to apply the above pros and cons to your own circumstances? No worries, we get it. In the finance and loan industry, we have to keep it pretty general as a lot of the answers really do come down to each applicant and the current market. As much as we hate saying ‘it depends’, it really does depend on your specific requirements and finances.
To tailor the above information further, here are some considerations you can make while comparing personal and car loans:
- Are your financial circumstances likely to change over the coming years?
If you’re anticipating some big changes in your financial circumstances in the coming years, you may be more suited to a personal loan. As an unsecured loan won’t use your car as security, there will be less risks, and you can potentially take advantage of variable rates and flexible repayment terms.
- Are you planning on purchasing a new or second hand vehicle?
Many of the bigger banks will be reluctant to hand out car loans to second hand or older vehicles. Although, at Credit One we do have access to lenders who will offer financing for used cars. With a secured car loan, because your loan is secured by your vehicle, lenders will want to be certain that it can earn its value on the loan, should you be unable to fulfill the terms.
This means that is often harder to get a car loan (though not impossible) to get a second hand car with a car loan. If you’ve got your eye on a special, pre-loved vehicle, you may be more suited to a personal loan.
- Do you have a good credit score?
While at Credit One we love a challenge, and will always do our best to provide loan solutions to all applicants, your credit score will still influence your options.
In the case of a car loan vs personal loan, a lower credit score may mean you’re more suited to a car loan. If you have a perfect credit score, you may be able to snag yourself more freedom and better rates with a personal loan.
Still Stuck?
Getting a loan for your dream car can be confusing, but it doesn’t have to be. We can help you to work out which loan is most appropriate for your specific circumstances, without the muck around. Furthermore, working with Credit One means that after we work out which type of loan is best for you, we’ll then take the hard work out of the next bit – comparing the different rates, lenders, and terms that are going to yield the best results.
Credit One are Australia’s highest reviewed finance brokers in the car industry – we have helped thousands of Aussies to secure their new wheels through personalised loan solutions. Partnering with over 40 of the country’s best financiers, we’re confident that we can find the perfect loan product for your specific needs and requirements. Ready to get started? Apply online for a free quote, or call our team directly on 1300 273 348.
