The fast answer is that a personal loan is more of a general-purpose cash loan that you are free to spend at your discretion.
There is nothing stopping you from purchasing a car with the proceeds of a regular personal loan. But this is usually an option of last resort.
A car loan is strictly for the purpose of purchasing a car, but is still a category of personal loan.
In this article, we will compare the two types of loans and consider the trade-offs when using either for the purpose of buying a car.
In This Post:
Car Loan vs. Personal Loan Comparison
In this section, we will discuss all of the differences between a car loan and a personal loan.
This will help you understand all of the fundamentals of each product and how you can use them to finance your next car.
If you would like some help working through your options then submit an inquiry below and our brokers will contact you.
Security
A secured car loan will have the purchased vehicle attached to the loan as collateral.
As a result, the potential consequence of defaulting on the loan is that you risk the car being repossessed by the lender.
This makes it easier for a lender to recover the money owed if you do not repay as per the loan contract.
As a result of the reduced risk for the lender, these loans are often cheaper than a personal loan.
When compared to an unsecured personal loan, there is no recourse linked to a particular asset if you default on your payments.
That doesn’t mean that there are no consequences for non-payment. There are!
But, the lender must go through a legal process to enforce the contract rather than just seize an asset.
Interest Rate
If a customer applies for a car loan and a personal loan at the same time then in the vast majority of cases the car loan will be cheaper for reasons covered in the previous section.
Lower risk means lower cost to the borrower.
However, this is highly dependent on the customer profile and their credit history.
A customer with a poor credit score may be stuck with a car loan interest rate that is over 20%. Which can make those repayments very costly!
That same customer may be looking at over 40% for an unsecured loan. So it is all relative to where you are at.
So look after your credit history at all times!
Repayment Terms
The duration of a repayment term is mostly the same between the two loan types.
A car loan can typically be repaid over a maximum of seven years. A number of personal loan lenders also have the same maximum term.
However, if we return to our bad credit example then that borrower will be much more restricted and may only be offered a repayment term of 18-24 months.
The secured car loan alternative is likely to be at least 3-4 years at a minimum.
Loan Purpose
A car loan is exclusively for the purchase of a vehicle. Funds are usually paid directly to the car dealership or seller, ensuring the money is used as intended.
When applying for a personal loan you may be asked what the funds are for (this is a legal requirement in some cases).
But once approved and you have the money in your account you can do with it as you please.
Speed to Approval
Personal loans often boast faster approval times than car loans, as they require less paperwork and don’t involve vehicle valuation.
Some lenders even offer near-instant approvals and can deposit the funds in your account within minutes.
A car loan can take longer, but they can also be very quick!
At Gusto Fiance, we took an application in the morning and had a customer driving away in their new car that afternoon.
You can read the full case study here.
But generally speaking, a car loan will be slower than a personal loan as there are more things to check when there is an asset involved.
Not only do lenders have criteria that the secured vehicle has to meet, but they also have to register the security interest.
This all takes time but these days it is lightning fast!
If you need a fast outcome to your car loan application then submit an inquiry below and our team of car loan brokers will get on the case.
Credit Score Eligibility
We have already discussed the impact that your credit history will have on the interest rate payable.
But what is also important to know is that a low credit score can exclude you from certain products.
An unsecured personal loan is inherently more risky and you may find that in some circumstances a borrower may not be eligible for a personal loan at all.
That same borrower may be able to get access to a secured car loan.
The rate will be high, and the loan term (possibly) shorter, but the secured asset may give just enough comfort for the lender to approve the loan.
Why Use a Car Loan
To state the obvious here, you will use a car loan exclusively for the purpose of buying a car given it is the cheapest option available to do so.
Pros
- Lower interest rates due to the secured asset.
- Access to a higher credit limit.
- More accessible for those with bad credit.
Cons
- Asset can be repossessed in case of default.
- Funds can only be used to purchase a vehicle.
- Limited flexibility for what you can do with the asset.
Why Use Personal Loan
A personal loan can be used for anything you like. Renovations, travel, a new couch, and even a car if you have been unable to finance with a typical car loan.
Pros
- No restrictions on the use of funds from the loan.
- Faster loan approval is possible.
- No collateral is required.
Cons
- Interest rates are generally higher.
- Loan approval may be tougher to obtain.
Buying a Car with a Personal Loan
If the borrower just doesn’t want a secured loan for whatever reason they could opt to buy a car with a regular personal loan.
This ensures the vehicle is unencumbered and they can do as they please with it.
There are also circumstances where the only option to buy a car could be to use a personal loan.
For example, the car may be too old for a lender to accept it as security.
If the kilometres on the odometer, or the age of the vehicle, indicate the car may not be mechanically sound for the duration of the loan a lender may avoid it altogether.
This can also be the case with rare cars that are bought by collectors. A lender may not accept it as security given the resale market is much narrower.
Conclusion
Both secured car loans and unsecured personal loans have their place for certain types of borrowers.
The secured option is cheaper but less flexible when tied to an asset.
The unsecured option is more expensive but separates the lender from the car. So it depends on what the borrower needs most in their loan solution.
Our team of brokers can help you work through these questions and find the most suitable lender for your circumstances, whether that is a car loan or a personal loan.
So click below to get in touch today.
