* Please note that this blog is not intended to give advice, but to share information.
If you are buying a car and trying to decide between a car loan and a personal loan, the short answer is this: a car loan is usually the cheaper option because the vehicle secures the loan, while a personal loan gives you more flexibility but usually costs more.
Which one suits you depends on the car you are buying, how you plan to use it and how much flexibility you need.
Both options can get you behind the wheel, but they work in different ways and suit different situations.
Understanding these differences upfront can save you money and help you avoid choosing a finance product that does not fit your circumstances.
How a Car Loan Works
A car loan is a loan that is secured against the vehicle you are buying. The car itself becomes the security for the loan and the lender registers an interest against it until you have paid the loan off in full.
Because the lender holds this security, car loans typically come with lower interest rates than unsecured finance. Most lenders reserve their best rates for new or near-new cars and many place limits on the age or condition of a used vehicle they are willing to finance.
If you fall behind on repayments, the lender has the right to repossess the vehicle and sell it to recover the debt. If the sale does not cover what you owe, you may still be responsible for the shortfall.
How a Personal Loan Works
A personal loan is not tied to any specific asset.
There is no vehicle, or anything else, acting as security, so the lender is taking on more risk.
This usually means a higher interest rate than a comparable car loan.
The upside is flexibility. A personal loan can be used to buy any car, new or used, from a dealer or a private seller, and the funds are paid directly to you rather than tied to a specific purchase.
This makes it a practical option if you are buying an older vehicle that would not qualify for a secured car loan or if you want the freedom to also cover costs like registration, insurance or minor repairs.
Because there is no vehicle securing a personal loan, it cannot be repossessed if you default.
The lender can still pursue you for the outstanding debt through debt collection or the courts and a default will affect your credit file either way.
Car Loan vs Personal Loan at a Glance
| Factor | Car Loan | Personal Loan |
|---|---|---|
| Security | The vehicle you are purchasing | None (unsecured) |
| Typical Interest Rates | Usually lower | Usually higher |
| Vehicle Restrictions | Often limited to newer or near-new cars | No vehicle restrictions |
| Use of Funds | Vehicle purchase only | Any purpose |
| Private Sale Purchases | Sometimes limited or unavailable | Widely available |
| Approval Speed | Often 24-48 hours | Often 24-48 hours |
| If You Default | Vehicle can be repossessed and sold | Vehicle cannot be repossessed, but the debt can still be pursued |
| Best Suited To | New or near-new vehicle purchases | Older, private-sale or flexible-use purchases |
When a Car Loan Makes Sense
Consider a car loan if you:
- Are buying a new or near-new car, often through a dealer
- Want the lowest interest rate available for the purchase
- Are comfortable with the car being used as security
- Have a clear idea of the exact vehicle you are buying
When a Personal Loan Makes Sense
Consider a personal loan if you:
- Are buying an older car that a car loan lender may not finance
- Are buying privately rather than through a dealer
- Want funds that can also cover registration, insurance or minor repairs
- Prefer not to have the vehicle tied up as security
Financing a Vehicle Through Your Business
If you are buying a vehicle for business use, a personal loan is rarely the right tool. Interest on a personal loan used for a private purchase is not tax deductible, even if you occasionally use the car for work.
Business buyers are generally better served by a business car loan or a chattel mortgage, where the business owns the vehicle from the outset. This structure allows the business to claim the GST credit, depreciate the vehicle, and deduct interest to the extent the car is used to produce income.
If you are a sole trader, self-employed, or run a small business and are looking at a work vehicle, it is worth speaking with a broker or your accountant before deciding on a structure, rather than defaulting to a standard personal loan.
Making the Right Decision
If you are buying a newer car from a dealer, a car loan will usually give you the lower rate.
If you are buying an older car privately, need extra flexibility, or want funds to cover more than just the vehicle, a personal loan may be the better fit.
At Finch Financial, we compare car loan and personal loan options from a range of Australian lenders, so you do not have to work it out through guesswork.
Contact us today to talk through your situation and find the vehicle finance option that works best for you.
Frequently Asked Questions
Which is cheaper, a car loan or a personal loan?
A car loan is usually cheaper because the vehicle acts as security for the lender, which reduces their risk. Personal loans are unsecured, so lenders charge more to cover that extra risk.
Can I get a personal loan for a used car?
Yes. Personal loans are a common choice for older or private-sale vehicles that may not meet a car loan lender’s age or condition requirements.
Do I need good credit to get approved?
A stronger credit history will usually get you a better rate on either product. Car loans can sometimes be more accessible for borrowers with a limited credit history, because the vehicle provides security for the lender.
What happens if I cannot make my repayments?
On a car loan, the lender can repossess and sell the vehicle, and you may still owe the difference if the sale does not cover the full debt. On a personal loan, the car cannot be repossessed, but the lender can still pursue you for the debt and it will affect your credit file. If you are struggling with repayments, contact your lender early to discuss your options.
Can I use a personal loan to buy a car for my business?
You can, but it is usually not the best option. Interest on a personal loan for a private purchase is not tax deductible, even for business use. A business car loan or chattel mortgage is generally a better structure, as it allows the business to claim GST credits and deduct interest and depreciation.