Personal Loan vs Car Loan: Pros and Cons Explained

Thinking of taking out a loan to buy a new car? You’re right to do your research. Both personal loans and car loans can fund the purchase of a new car, but there are key differences in how each loan works.

The two main differences between a personal loan and a car loan are how the funds can be used, and whether the loan is secured to an asset or not.

A personal loan can be used to pay for anything, including a home renovation, a holiday or a car purchase. A car loan can only be used to buy a car.

Personal loans are usually unsecured, meaning no collateral is required. A car loan is generally secured against the car you’re buying - if you can’t make repayments for the loan, the lender can take ownership of the car and sell it to pay off the outstanding amount.

Pros And Cons Of A Personal Loan

Personal loans are more flexible in what the funds can be used for. You can choose to split funds between a car purchase and something else, like a renovation, reducing the need to apply for multiple separate loans.

A personal loan may also offer more options for borrowers to customise the loan terms. You can choose between fixed or variable interest rates and adjust the loan term to change the size of the repayments.

A personal loan typically has higher interest rates than a car loan. Personal loans are unsecured, which can be a risk for lenders. Lenders check your credit score and income more carefully for a personal loan than for a car loan to see if you can repay it.

Pros:

• Flexible repayments
• No restriction on how funds are used

Cons: 

• Higher interest rates
• Stricter lending criteria

Pros And Cons Of A Car Loan

Lenders have a more streamlined process for car loan applications and more flexible lending criteria, so it’s usually easier and faster to get approved for a car loan.

Most car loans offered by lenders are secured against the vehicle, but there’s no risk of losing it as long as you make repayments on time.

Securing the car loan against the vehicle allows lenders to offer lower interest rates, often much lower than a personal loan. The loan’s interest rate is fixed for the term so you’re protected from market interest rate fluctuations. Repayments for a secured car loan are fixed with little to no room for extra payments without incurring extra fees.

Pros: 

• Easier to get approval
• Lower interest rates

Cons:

• Risk of losing the car if repayments are not made
• Less flexible repayment terms

Deciding Between A Personal Loan Vs A Car Loan

In most cases, you’ll save more with a car loan than a personal loan due to the interest rate difference. A personal loan is better for smaller borrowing needs like covering the balance of a car purchase. Your borrowing needs, repayment ability, and borrowing history help decide if a personal loan or a car loan is better.

To get a better understanding of your options, we recommend working with a loan broker who can search and compare for the best loan options for you. Find an approved loan broker with Before U Loan to get the best personal or car loan for you.