Car Loan vs Personal Loan: Which Is Better for Buying a Vehicle?

When it comes to financing a vehicle purchase in Australia, many buyers assume a car loan is their only option. However, personal loans can also be used to buy a car, and in some situations, they might actually be the better choice. Understanding the key differences between these two financing options is essential for making an informed decision that suits your specific circumstances and could potentially save you thousands of dollars.

What Is a Car Loan?

A car loan, also known as an auto loan or vehicle finance, is a secured loan specifically designed for purchasing a vehicle. The car itself serves as security (collateral) for the loan. This means if you fail to make your repayments, the lender has the right to repossess the vehicle to recover their funds.

Because the loan is secured against an asset, lenders view car loans as lower risk, which typically translates to lower interest rates compared to unsecured lending products. Most car loans in Australia come with terms ranging from one to seven years, with the vehicle registered in your name but with the lender noted as a secured party on the title.

What Is a Personal Loan for a Car?

A personal loan is a more flexible borrowing option that can be used for virtually any purpose, including buying a car. Personal loans come in two varieties: secured and unsecured. An unsecured personal loan doesn't require any collateral, while a secured personal loan uses an asset (which could be the car you're buying, savings, or other property) as security.

When you use an unsecured personal loan to buy a car, you own the vehicle outright from day one with no encumbrance on the title. This gives you complete freedom to sell or modify the car as you wish. However, this flexibility comes at a cost— unsecured personal loans typically have higher interest rates because the lender takes on more risk.

Interest Rates: The Key Difference

The most significant difference between car loans and personal loans is usually the interest rate. As of late 2024, typical rates in Australia look something like:

Secured Car Loans: Generally range from 5.5% to 10% per annum, depending on the vehicle age, your credit history, and the lender. New car loans often attract the lowest rates.

Unsecured Personal Loans: Typically range from 7% to 15% or higher. The rate you're offered depends heavily on your credit score and the lender's assessment of your risk profile.

Secured Personal Loans: Fall somewhere in between, often similar to car loan rates if the car is used as security.

Use our car loan repayment calculator to see how different interest rates affect your total repayments over the life of the loan.

Ownership and Flexibility

With a Car Loan: You use the car and are responsible for its maintenance and insurance, but technically the lender has an interest in the vehicle until the loan is fully repaid. There are usually restrictions on selling the car or making significant modifications without the lender's approval. If you want to sell before the loan ends, you'll need to pay out the remaining balance first.

With an Unsecured Personal Loan: You own the car outright with no encumbrance. You're free to sell it whenever you like, use the proceeds however you want, and make any modifications without seeking approval. This flexibility can be valuable if your circumstances might change or if you like to upgrade vehicles frequently.

When a Car Loan Makes More Sense

A dedicated car loan is usually the better choice when:

You want the lowest possible interest rate: If minimizing interest costs is your priority and you're comfortable with the car being used as security, a car loan typically offers the best rates.

You're buying a newer vehicle: Lenders offer their best car loan rates for new or nearly new vehicles because they represent better security. If you're buying new, a car loan is almost always more economical.

You plan to keep the car long-term: If you don't anticipate needing to sell the car before the loan ends, the restrictions of a car loan won't affect you, and you'll benefit from the lower rate.

You have an average credit score: Car loan lenders may be more forgiving of imperfect credit because they have the security of the vehicle. You might get approved for a car loan when a personal loan would be declined or offered at a much higher rate.

When a Personal Loan Makes More Sense

A personal loan might be the better option when:

You're buying an older or unusual vehicle: Many car loan lenders have restrictions on vehicle age (often not financing cars older than 7-10 years) or won't finance certain types of vehicles. Personal loans have no such restrictions.

You're buying privately: Some car loan products are only available for dealer purchases. Personal loans work regardless of where you buy the car.

You want ownership flexibility: If you might want to sell the car quickly or frequently upgrade, not having an encumbrance simplifies the process significantly.

The loan amount is relatively small: For smaller loans, the difference in interest costs between a car loan and personal loan might be minimal, making the convenience of a personal loan worthwhile.

You have excellent credit: If you have a stellar credit history, you might qualify for personal loan rates that approach car loan rates, reducing the financial advantage of secured lending.

Fees and Charges to Consider

Beyond interest rates, compare the fees associated with each loan type:

Establishment fees: Both loan types may charge upfront fees, though they vary widely between lenders. Some promote "no fee" loans but compensate with higher rates.

Ongoing fees: Monthly account-keeping fees can add up. Compare the total cost over the loan term, not just the headline rate.

Early repayment fees: If you might pay off the loan early, check what penalties apply. Personal loans often have more flexibility here.

Making Your Decision

There's no universally "right" answer—the best choice depends on your individual circumstances. Consider your priorities: Is the lowest cost paramount, or is flexibility more important? How long do you plan to keep the car? What's your credit situation? What type of vehicle are you buying?

Whatever you decide, use our car loan calculator to run the numbers on different scenarios. Compare total costs, not just monthly payments, and factor in all fees to get a complete picture.

Conclusion

Both car loans and personal loans have their place in vehicle financing. Car loans typically offer lower rates but come with restrictions, while personal loans provide more flexibility at a potentially higher cost. By understanding the trade-offs and honestly assessing your needs and circumstances, you can make a choice that saves you money and gives you the peace of mind you need when financing your next vehicle.