“Car loan, personal loan, car loan, personal loan” - If your thoughts are going back-and-forth like this, I bet you’re wondering which is the best option for your car purchase. Though similar, one of these two options may suit your financial situation more than the other.
If you’re in the market for a new car, finding out the key differences is an important part of the process. In this guide we will compare the two by analysing the advantages and disadvantages.
Personal Loan
A personal loan is a loan given by a lender for the borrower to make a large purchase they wouldn’t be able to fund themselves. This can include renovations, or holidays. Personal loans can be secured or unsecured. An unsecured personal loan means there is no collateral for the loan, like an asset. A secured personal loan means the lender has collateral on the loan.
When deciding if a personal loan is right for you, it's important to consider factors such as the amount of money you need, the loan balance you can manage, and the repayment term that fits your budget. Personal loans
Car Loan
A car loan is a type of personal loan specifically designed for the purchase of a car (shocking). As discussed above in the ‘Personal Loan’ section, a secured personal loan means the lender has collateral on the loan. This collateral could be a car. Therefore, a car loan is generally a type of secured personal loan.
So why would you use a personal loan to purchase a car if you can just use a car loan? Let’s get into it.
The Difference Between a Car Loan and a Personal Loan
Simply put, the restrictions and interest rates are the key differentiating factors between car loans and personal loans.
Lenders generally have tight criteria and restrictions for car loans and will typically require borrowers to use the car as collateral. This means, if the borrower defaults on payments, the lender may seize the car. With a car loan, lenders can also be strict on the types of cars being purchased such as older or used cars. Additionally there is generally a longer and more detailed approval process involved for a car loan.
Personal loans on the other hand, won’t always have the same restrictions as car loans. Some don’t require any collateral at all. However, this is considered a luxury and therefore the borrower will generally be subject to higher interest rates on the loan. Additionally, with a personal loan, sometimes you won’t have to disclose what you're purchasing and how much it is, meaning you could borrow more than the car costs and use the leftover funds for another purchase.
Generally speaking, most car loans will have a fixed interest rate. While personal loans have a relatively even split of fixed-rate and variable-rate options. Fixed-rate keeps your repayments steady throughout the loan term, while a variable-rate will see your payment fluctuate.
Comparison Snapshot
| Car Loan | Personal Loan | |
| Advantages | Lower interest rates. Fixed interest rates. Ability to borrow more. | Flexibility to buy whatever car you want. Can use leftover funds for other purchases. |
| Disadvantages | Car is used as security. Restrictions on what car you can purchase. | Usually higher interest rates than car loans. |
Key Considerations: Personal Loan Vs Car Loan
- How much are you able to repay each month?
If you want to pay the lowest amount possible, a secured loan could be the best option for you because they generally attract lower interest rates. - Do you want an unsecured or secured loan?
Consider if you want to use your car or another asset as collateral against your loan. With a secured loan, if you default on it, your car would be repossessed. If you default on an unsecured loan, you could have legal action launched against you. - Are you going to purchase a new or second hand car?
Secured car loans are generally better for new cars. Unsecured personal loans are generally better for older and used cars. - What is your credit score?
It can be hard to secure a car loan if you don’t have a good credit score. In this case, a personal loan could be your best option.
Personal Loan and Car Loan: How important is my credit score?
If you have a less than ideal credit score, you may be ineligible for a loan with some lenders. For lenders who have less stringent criteria on credit ratings, you might be able to secure a loan but at a very high interest rate.
Credit scores are particularly important for personal loans. This is because, unlike car loans that have a variety of factors to help determine the rate (such as the age and value of the vehicle), personal loans only have your credit score to consider.
The Federal Government MoneySmart website provides information on where to access a free copy of your credit report. This information includes the contact details for several credit reporting agencies.
How can I increase my credit score?
If you have a bad credit score, all is not lost. Your credit score is not a permanent number and, through consistency, it is possible to improve your credit score and become an ideal borrowing candidate. Some positive behaviours you can undertake to improve your score include:
Paying off old debt
The first thing you need to do is pay off any outstanding debt and settle your accounts. Paying off debt can significantly improve your credit score, but it also lowers the amount of interest you will need to pay over time.
Apply for short term loans
With a less than ideal credit score, you can still apply for short term loans. Choosing to repay them on a regular basis, and not missing any payments, will boost your credit score.
Pay on time, every time
Consistency is key when it comes to a good credit score. Paying bills on time, every time, will stand out in your payment history and make lenders more comfortable lending to you. A key way to make sure you don’t miss these payments is to set up an autopay mechanism for recurring payments.
Check your credit report regularly
By analysing your credit report you will be able to identify the specific factors that are bringing down your score. In addition, if you see any errors showing up on your credit report, it is important to dispute them to get them taken off quickly and improve your score.
Don’t apply for multiple credit products at the same time
If lenders can see you have been stretching yourself thin by applying for multiple credit products simultaneously, they will be less likely to lend to you.
Closing Thoughts
Both car loans and personal loans are great options if you are in the market for a new vehicle. If you are buying a new car and want to spend less money over the life of the loan, a car loan might be a good option for you. If you are buying an older car that might not qualify as collateral on a secured loan, a personal loan might be the better option for you. However, it is important to talk to an expert consultant at Jade Finance prior to signing any agreement.
In the market for a new or used car? Jade Finance Has You Covered.
With 25+ years of experience in the motor vehicle lending market, our expert consultants at Jade Finance use their technical resources and extensive lender base to source the best rates across all types of credit products. We assist buyers to purchase vehicles with simple, easy, and straightforward funding at the lowest rates.
For the best deal based on your circumstances, request a quick quote online or by phone to one of our dedicated broker on 1300 000 008.
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