Written by , updated on July 4th, 2023
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Personal loans and car loans are both viable options when it comes to car finance. Read more about both and learn how to compare your options here.
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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.
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 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.
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.
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 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 for the amount you’re requesting hinges on a variety of factors such as:
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 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.
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.
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.
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.
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.
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