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Personal Loans vs Car Loans

Personal loans and car loans are both viable options when it comes to car finance. Read more about both and make the best choice for you here with Savvy.
Published on February 26th, 2021
  Written by 
Thomas Perrotta
Thomas Perrotta is the managing editor of Savvy. Throughout his time at the company, Thomas has specialised in personal finance, namely car, personal and small loans, although he has also written on topics ranging from mortgages to business loans to banking and more. Thomas graduated from the University of Adelaide with a Bachelor of Media, majoring in journalism, and has previously had his work published in The Advertiser.
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   Reviewed by 
Bill Tsouvalas

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Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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When looking for car financing, you have two main options: taking out a car loan or opting for a personal loan. While you may not think that the difference is significant, it’s worth learning more about each type of loan and comparing which one suits your needs more closely. Read about the difference between personal loans and car loans, and how you can benefit both options, here.

What are the differences between personal loans and car loans?

There are several key differences that you’ll be able to experience between a personal loan and a car loan. Take a look at some of the areas that you’ll need to compare and consider between the two types of finance:

Personal loans

Personal loans are one of the most versatile types of finance. They allow a borrower to use the loan to for any number of reasons, including financing a holiday, renovations, studies and, of course, a car. This means that you can bundle extra funds on top of the price of your car to pay off some unexpected bills, you’re more than able to.

Personal loans present you the possibility of borrowing a particular amount of money, which you will make repayments for either weekly, fortnightly or monthly until you manage to make all the repayments over a term of between one and seven years. This amount can be approved for almost anything, with no restrictions on the type of car you wish to purchase being one of the primary advantages here. If you wanted financing for an old, beat-up car, a personal loan would be a more suitable option.

Personal loans are usually unsecured loans and because of that additional risk, they usually come with a much higher interest rate than those of secured loans. This means that the longer the term of your loan is, the more you’ll have to pay in interest overall. Additionally, a bonus of personal loans is that they’re easy to apply for and boast a fast turnaround time. Because of the fact that these loans are unsecured, there’s no requirement for your lender to assess the suitability of the car as security for the loan. There are also usually fewer documents required as part of your application, which also speeds up the process.

Car loans

The central distinction between a personal loan and a car loan is that car loans are secured by the purchase of the car itself. With that additional security comes better interest rates and cheaper fees, which is the primary benefit that car loans hold over personal loans. This means that with a car loan and personal loan to be repaid over the same period, the former will almost always be the cheaper option for you. They can last from one to five years in duration, with this period to be established before signing the contract. You will be required to make repayments until that particular date. 

While a car loan is not dissimilar from a personal loan in most ways, where it does deviate is in relation to how you can use your funds. A car loan provides the funds to finance your car and your car only, so unlike personal loans which afford you the freedom to use them on whatever you like, this isn’t the case with this type of finance. Furthermore, because your loan is secured by your vehicle, your lender will want to be certain that it can earn its money back on your loan should you become unable to fulfil it. This means that the selection of cars that you’re able to buy with a car loan is reduced to newer models that can carry value in the market, rather than any car of any age you like. 

All in all, if it’s a car that you’re looking to purchase, so long as it’s not too old, in almost every case it’s best to opt for a car loan over a personal loan.

How much can I borrow with a personal loan vs a car loan?

Personal loans have different borrowing capacities when compared to car loans. If you’re looking to take out a larger amount, consider how much you can borrow with each here:

Personal loans

Personal loan borrowing limits are set between around $2,000 and $50,000 for any borrower. This doesn’t mean that you’ll be approved for this amount, though, as approval hinges on a variety of factors such as:

  • Your monthly or annual income and expenses – is what you’re earning enough to support the repayment terms that you’re after?
  • Your savings – have you shown yourself to be a disciplined saver and have a backup plan if anything changes occur in your life?
  • Your existing debts – are you balancing any other repayments on top of your living expenses and the proposed car loan?
  • Your credit score – does your rating suggest that you’re able to borrow larger amounts of money and pay them back?
  • Your loan purpose – are your purchases riskier? For example, are you paying for a holiday on top of your car purchase?
  • Your loan security – have you decided to provide security for your personal loan to reduce its rate and increase your borrowing power?

Your approved amount will also be dependent upon the lender that you choose to go with. Different financiers will have different requirements when it comes to how much they’re willing to lend you. For example, smaller online lenders may be open to approving you for more money than a bigger traditional lender if your credit score isn’t perfect.

Car loans

Car loan amounts will typically range from $3,000 all the way up to between $80,000 and $100,000. Lenders will assess borrowers on a case-by-case basis in the same areas that they would for a personal loan. However, the key difference with these loans is that the amount you’re approved for is directly tied to the car that you’re purchasing. For example, if you’re applying to buy a $30,000 car, the most you can be approved for is $30,000. This number may be less than that, though, depending on the type of car and how much the lender values it at.

How do personal loans and car loans compare?

Interest

You should always look for the lowest possible interest rate on your personal or car loan to ensure that you save money over its lifespan. Unsecured loans will almost always attract higher rates than secured loans, meaning that car loans are the best option if you’re looking for lower interest payments on your loan.

Fees

Interest isn’t the only consideration, though, as fees can make a significant difference to what you’ll pay for your loan. Application fees reaching $600 (personal) to $1,000 (car), ongoing fees of up to $20 a month (personal) or $150 a year (car) and late repayment fees of up to $50 can all have an impact on your loan. 

Security

Whether you want to provide security for your loan or leave it unsecured is a point of comparison for borrowers. Those who want added security, and the benefits that come with it, should opt for a car loan. However, if you don’t want any restrictions on your asset, a personal loan can provide you with a viable unsecured alternative.

Loan amount

As mentioned, personal and car loans have different borrowing ranges that can limit the amount you’ll be approved for. For example, if you want a $60,000 loan for a new car, a personal loan cannot be granted for that sum of money, but a car loan can.

How do I apply for a car loan or personal loan?

There are several steps involved when taking out a loan, which can vary depending on the lender and type of loan. Here’s a general guide on how to apply:

  1. Choose your lender: find a lender that offers the best terms and rates for your needs. You can consider banks, credit unions, online lenders or other financial institutions.
  2. Gather documents: collect the necessary documents for your loan application. Common documents may include:
    – Proof of identity (driver's licence, passport)
    – Proof of income (pay stubs, tax returns)
    – Employment verification (employment letter, recent pay stubs)
    – Proof of residence (utility bills, lease agreement)
    – Bank statements
  3. Fill in application form: complete the loan application form provided by the lender. You may need to provide personal information, employment details, financial information and details about the loan amount and purpose.
  4. Submit application: submit it to the lender along with the required documents. You can usually do this online through the lender’s website or in person at a branch office. The lender will review your information and assess your eligibility for the loan.
  5. Review loan offer: if your application is approved, the lender will send you a loan offer detailing the terms and conditions of the loan, including the interest rate, loan amount, repayment schedule and any fees. If you're satisfied with the offer, you can accept it by signing the loan agreement.
  6. Receive funds: once you've accepted the loan offer and signed the agreement, the lender will disburse the loan funds to you. For a car loan, the funds may be directly transferred to the seller or dealership.

How can I make the most of my loan?

Whether you take out a personal loan or a car loan, there are ways to save money and boost your chances of approval:

  • Compare lenders: don't settle for the first offer you receive. Shop around and compare interest rates, fees and terms from different lenders to ensure you're getting the best deal possible.
  • Reduce the size of the loan: the smaller your loan is, the less interest it’s likely to accrue. This will also make your loan repayments more manageable. Consider combining your savings with your loan to shrink the principal amount. 
  • Improve your credit score: a higher credit score can increase your chances of loan approval and lower your interest rates. To improve your credit score, focus on paying bills on time, reducing debt and correcting any errors on your credit report.
  • Buy a new car: opting for a new or near-new car can increase your chances of car loan approval, as the vehicle can serve as collateral, reducing the lender's risk.
  • Be realistic: only apply for loan amounts you can realistically afford to repay. Lenders assess your ability to service the loan, so requesting an amount within your budget improves your approval chances.
  • Explore specialist lenders: if you have bad credit, consider specialist online lenders who have more lenient eligibility criteria. While these loans may come with higher interest rates and fees, they can provide financing options when traditional lenders may decline your application.
  • Early repayment: you generally have the option to pay off your loan before its end date without penalty. While some lenders may charge a fee for early repayment, settling your loan ahead of schedule can save you money on interest in the long run.

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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.

The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.

Approval for car loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.

The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.

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