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Reviewed by When you’re on the lookout for a new car, you’re bound to come across a wide range of lenders offering both car loans and personal loans for your car. So, which one should you choose? Are they the same thing?
It’s important to understand how they’re different and when each option might be best for you, so we’ve broken down how each of them work, their pros and cons and more to give you the best shot at locking in the best one for your needs.
What are the differences between car loans and personal loans?
Although car and personal loans share their similarities, they also have their fair share of differences. This table shows how these two finance types stack up:
| Car loans | Personal loans | |
|---|---|---|
| Loan security? | Required (car being purchased) | Not required (both unsecured and secured available) |
| Loan amount? | Up to 100% of car’s value (or more if on-road costs are included) | Up to $75,000 (unsecured) or $100,000 (secured) |
| Loan terms? | One to seven years | One to seven years |
| Loan usage? | Buying a car | Flexible to your needs (including buying a car) |
| Interest rates? | Lower than unsecured personal loans | Unsecured: higher than car loans Secured: rates may be similar to car loans |
| Early repayments? | Yes, but fees typically apply | Unsecured: yes Secured: yes, but fees may apply |
| Deposit required? | No | No |
The Pros and Cons of Dealer Finance and Car loans
- Lower interest rates and fees
- Higher potential maximum loan amount
- Typically come with fixed interest rates, which are better for budgeting
- Some lenders allow you to include on-road costs in your loan
- Use your loan however you like, not just to buy your car
- Are often faster to process, approve and fund
- No need to put up an asset as collateral
- Free early repayments can help you save
- Not all cars will qualify for a loan
- Funds can only be used towards a car or approved car-related costs
- If you default, you could lose your car
- Higher interest and fees in most cases
- Lower borrowing limits
- May be harder to get approved for the amount you want (or at all) if your credit isn’t the best
What’s cheaper: a car loan or a personal loan?
As we’ve mentioned above, car loans have lower interest rates than unsecured personal loans. As a result, you’re likely to find that, out of a car loan and personal loan of the same size, the car loan is cheaper. Here are some examples of what each of these loans might look like:
| Type of loan | Loan amount | Loan term | Interest rate | Monthly repayment | Overall cost |
|---|---|---|---|---|---|
| Car loan | $25,000 | Five years | 6.50% p.a. | $490 | $4,350 |
| Personal loan | $25,000 | Five years | 8.25% p.a. | $510 | $5,595 |
| Car loan | $50,000 | Five years | 6.50% p.a. | $979 | $8,699 |
| Personal loan | $50,000 | Five years | 8.25% p.a. | $1,020 | $11,189 |
Interest rates are for example purposes only and do not reflect the rate you will receive on your car or personal loan.
Which type of loan is best for me?
Ultimately, the best choice for you depends on what you want out of your loan. Let’s take a look at some of the situations where you might choose a car loan over a personal loan and vice versa:
- You’re buying a new or near-new vehicle: in almost all cases, a car loan will be the most suitable option when buying a new car or one that’s only a few years old.
- You’re buying an old vehicle or a fixer-upper: cars like these often won’t qualify for a secured car loan. You’ll have to take out a personal loan if that’s the case.
- You want to use your loan for multiple purposes: if you want to finish a few renovations or consolidate debts at the same time, a personal loan allows you to do that.
- You want the cheapest available option: you’ll find that car loans will cost you less than unsecured personal loans.
- You want to add a balloon payment to your loan: a balloon payment is a bit like a deposit, except you pay it at the end of the loan. Having one reduces your repayments but increases your interest overall. These are only available on certain car loans.
- You want the freedom to pay off your loan early: clearing your debt ahead of schedule could potentially save you hundreds, if not thousands, of dollars. While some car loans allow you to do this for free, you’re more likely to be able to pay off your car early with a personal loan.
Helpful guides on car loans
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