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Personal loan vs car loan: which one to choose?

Posted on 18 September 2024
If you’re thinking about buying a new car, you may have to decide between two common borrowing options to finance the vehicle—personal loans and car loans.
 
In this article, we’ll explore the key differences between personal loans and car loans, their pros and cons, and factors to consider when making your decision. We’ll also discuss Credit24 loans as a flexible personal loan option for hassle-free financing.
 
Learn more about Credit24 loans

Personal loan vs car loan: the main differences

Understanding the key differences between personal loans vs car loans is important in making an informed credit decision. Let’s take a look at these distinctions:
 
Security: Car loans are typically secured loans as the vehicle itself is the collateral. This means if you default on payment, the lender can seize the car. Personal loans, on the other hand, can be either secured or unsecured. Unsecured personal loans don’t require collateral but may have a higher interest rate due to the increased risk they pose for the lender.
 
Interest rates: Car loans often have lower interest rates compared to personal loans especially unsecured ones. This is because the vehicle serves as security and reduces the lender’s risk.
 
Loan purpose: Car loans are specifically designed to purchase vehicles and may have restrictions on the type and age of cars you can buy. Personal loans offer more flexibility as they allow you to use the funds for any need you may have including buying a car.
 
Loan terms: Both car loans and personal loans usually have 1-7 years of repayment terms.¹
 
Loan amount: Car loans are limited to the value of the vehicle you’re purchasing while personal loans may offer higher or lower amounts depending on your creditworthiness.
Loan Comparison Table
Basis of Difference Car Loan Personal Loan
Purpose Specifically for vehicle purchase Can be used for various purposes including car purchase
Collateral Secured (Car is the collateral) Can be both secured and unsecured
Interest Rate Typically lower than personal loans Usually high
Loan Amount Based on the car’s value Based on creditworthiness
Down Payment Often required Not typically required
Disbursement Paid directly to the car dealer Paid to borrower
Early Repayment May incur early repayment fee Often flexible

Personal loan vs car loan in Australia: Pros and Cons

To decide what’s better a personal loan or car loan, let’s take a look at the pros and cons of each.

Car loan pros

  • Lower interest rates compared to unsecured personal loans
  • Longer repayment terms
  • Easier approval process
  • Possibility of dealer incentives or manufacturer financing options

Car loan cons

  • Limited to purchasing vehicles only
  • May impose restrictions on the age and type of car you can buy
  • Risk of the car getting seized by the lender if you default on payments
  • Potential early repayment fees

Personal loan pros

  • Flexibility to use funds for various purposes, including car purchase
  • No restrictions on the type or age of the car you can buy
  • Option to borrow more than the car’s value if needed
  • No risk of losing the car if you default on unsecured personal loans

Personal loan cons

  • Higher interest rates, especially for unsecured loans
  • Shorter repayment terms and higher monthly payments
  • Stricter approval criteria, particularly for those with lower credit scores
  • Potentially longer approval process

Is it better to get a personal loan or car loan?

What’s better a personal loan or a car loan depends on your particular requirements and financial situation. Consider the following factors to determine which option is best for you:

1.    Your Choice of the Car

If you’re eyeing a brand-new car or a relatively recent model, a car loan might be more suitable. However, if you’re interested in an older vehicle, a second-hand/refurbished or a classic car, a personal loan can be a good idea as car loans often have age restrictions.

2.    Repayment Capacity

Assess your budget and decide how much you can comfortably allocate to monthly repayments. Car loans typically offer longer terms, which can result in lower monthly payments. But they may cost more over time since you end up paying interest for a longer period.

3.    Secured Loans vs Unsecured Loans

If you’re willing to use your car as collateral and benefit from lower interest rates, a car loan may be the preferable choice. If you’d rather not risk losing your vehicle in case of default, an unsecured personal loan could be a better option.

4.    Lower Interest Rates or Flexible Loan Terms

Car loans generally offer lower interest rates but may have stricter terms. Personal loans, although have higher rates, often provide more flexibility in terms of repayment and usage of funds.

5.    Early Repayment Options

If you anticipate paying off your loan ahead of schedule, check for early repayment fees in the loan agreement. Personal loans often offer more flexibility in this regard compared to car loans.

6.    Credit Score and Borrowing Capacity

Your credit score plays an essential role in deciding which loan option will be more suitable for you. If you have a strong credit score, you may qualify for competitive interest rates on both personal and car loans. However, if your credit is less than impressive, a secured car loan might be easier to obtain.

7.    Additional Funds

If you require additional funds beyond the car’s value—possibly for registration, insurance, or modifications—a personal loan may be more suitable, as it allows you to borrow a higher amount.

8.    Availability of Downpayment

Many car loans require a downpayment, typically around 10-20% of the vehicle’s value. If you don’t have savings for a downpayment, a personal loan might be a more feasible option for you.

9.    Compare Providers

Regardless of which loan type you choose, it’s important to compare offers from multiple lenders. You should look at interest rates, fees, loan terms, and customer reviews to find the best deal for your loan.

Introducing Credit24 flexible personal loans

If you decide that a personal loan is the best fit for your needs, you can apply for Credit24 flexible personal loans with customized terms. Here are some of its benefits:

  • Loan amount: Based on your eligibility, you can borrow up to $10,000 quickly and use it towards purchasing your vehicle.
  • Flexible repayments: Choose between a monthly, weekly, or fortnightly repayment schedule that suits your budget.
  • Fixed repayments: Your repayment amount is fixed upfront, allowing you to plan your finances with certainty.
  • Early repayment option: Make advance payments without incurring any fees, helping you save on interest.
  • Credit score consideration: While a good credit score can help you secure better interest rates, you may be eligible to get a loan with Credit24 even if you don’t have a great credit score.
  • Unsecured loan: You won’t need to risk assets like the car you’re purchasing since Credit24 personal loans don’t require any collateral.

Disclaimer:
IPF Digital Australia Pty Ltd, trading as Credit24, ABN 59 130 894 405. Australian Credit Licence 422839. The information in this article is of general nature and does not take into consideration your objectives, financial situation or needs. Lending criteria, fees and charges apply. For more information about our products, eligibility criteria and terms and conditions, please visit www.credit24.com.au.

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