Car loans vs personal loans: pros and cons
If you’re buying a car and need to get a loan, you may be wondering which is best – a car loan or personal loan?

If you’re buying a car and need to get a loan, you may be wondering which is best – a car loan or personal loan?
Key points:
- Car loans are a type of personal loan, but there are distinctions in terms of how they work.
- Car loans are usually ‘secured’, with the vehicle itself acting as security against your repayments.
- Personal loans can sometimes be ‘unsecured’, attracting higher interest rates and fees.
Key differences between car loans and personal loans
The first key difference between personal loan vs car loans is that a car loan is usually secured, where the car itself is used as security for the loan. As such, car loans are typically for new or near new cars. You can get an unsecured car loan, but it will often have a much higher rate of interest because of the increased risk for a lender.
A personal loan allows you to borrow money for a wider variety of purposes, like financing a holiday, a car, home renovations, or consolidating your debts. While you may need to specify what the purchase is for – in this case, buying a car – you might be able to borrow more than the car costs and use extra funds for another purchase or to boost your cash flow (provided you can meet the repayments). Loans can be unsecured or secured, and come with a fixed rate or a variable rate.
Pros and cons of car loans
If you’re exploring new car loans to help buy your car, then it’s likely your car will be secured against the loan amount using collateral. Or, you could take out an unsecured car loan. Here are some pros and cons for secured car loans:
Pros:
- They typically attract lower interest rates than unsecured personal loans.
- They often come with fixed rates, giving you more certainty about meeting repayments for the life of the loan.
- You may be able to borrow a higher sum than with an unsecured car loan, depending on your circumstances.
Cons:
- You might be restricted on the type of car you can purchase (e.g. new or near new only).
- You could lose the car or other collateral if you can’t meet repayments.
- Fixed rate loan terms and fees can be less flexible, especially regarding extra or early repayments.
While it is possible to find variable rates and unsecured car loans, they might not be as common, so shopping around could be a good idea.
What about car dealership loans?
Car dealerships can also offer new car financing. If you explore this option, you may find some dealers offering appealing interest rates (some as low as 0%), but be mindful of the terms and conditions, such as balloon payments. Moneysmart suggests shopping around for a car loan before going to a car dealership to make sure you’re getting the best deal available to you, potentially saving thousands in interest and fees.
As you can see, car loan products can vary significantly between lenders. So, it’s important to take the time to compare specific fees, interest rates, features and conditions to work out what’s right for your needs.
The comparison rates for car loans are based on credit of $30,000 and a term of 5 years, unsecured, unless otherwise stated.
^WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
Canstar may earn a fee for referrals from its website tables, and from Sponsorship or Promotion of certain products. Fees payable by product providers for referrals and Sponsorship or Promotion may vary between providers, website position, and revenue model. Sponsorship or Promotion fees may be higher than referral fees. Sponsored or Promotion products are clearly disclosed as such on website pages. They may appear in a number of areas of the website such as in comparison tables, on hub pages and in articles. Sponsored or Promotion products may be displayed in a fixed position in a table, regardless of the product’s rating, price or other attributes. The table position of a Sponsored or Promoted product does not indicate any ranking or rating by Canstar. For more information please see How We Get Paid.
Pros and cons of personal loans to buy a car
If you’re thinking about getting a personal loan to buy a car, the main differences are likely to be that the loan is unsecured and that you can use the loan for different expenses. Here are a few potential pros and cons of an unsecured personal loan to consider:
Pros:
- Flexibility to buy a new or old car.
- Possibility to borrow and use extra funds to boost your cashflow or make another purchase.
- Flexibility to choose loan terms that best suit your needs, like secured or unsecured, variable or fixed interest rates.
- If your personal loan is unsecured, you won’t automatically lose the car if you’re unable to make repayments.
Cons:
- Unsecured personal loans tend to attract higher interest rates and fees.
- Lenders might rely more heavily on the borrower’s finances, such as their income and credit score, to determine borrowing power.
- If a borrower can’t meet their repayments, the lender can take you to court to recover the money.
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Additional repayments
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Redraw facility
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Top-up facility
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Application fee: $0
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Annualised fee: $0
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Loan terms available: 1 year to 7 years
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Additional repayments
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Redraw facility
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Top-up facility
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Application fee: $0
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Annualised fee: $0
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Loan terms available: 5 years
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Additional repayments
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Redraw facility
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Top-up facility
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Application fee: $0
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Annualised fee: $0
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Loan terms available: 3 years to 7 years
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Additional repayments
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Redraw facility
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Top-up facility
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Application fee: $575
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Annualised fee: $0
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Loan terms available: 3 years to 7 years
Canstar may earn a fee for referrals from its website tables, and from Sponsorship or Promotion of certain products. Fees payable by product providers for referrals and Sponsorship or Promotion may vary between providers, website position, and revenue model. Sponsorship or Promotion fees may be higher than referral fees. Sponsored or Promotion products are clearly disclosed as such on website pages. They may appear in a number of areas of the website such as in comparison tables, on hub pages and in articles. Sponsored or Promotion products may be displayed in a fixed position in a table, regardless of the product’s rating, price or other attributes. The table position of a Sponsored or Promoted product does not indicate any ranking or rating by Canstar. For more information please see How We Get Paid.
Car loan or personal loan to buy a car – which is best?
Ultimately, a car loan is a type of personal loan, and both car loans and personal loans can help you buy a car, so one is not necessarily better. What that means for you is that it’s less about pros and cons, and more about looking for the right product to suit your personal needs. You might find it helpful to ask yourself a few questions:
- Are you buying a new or older car?
- Would you prefer to have a secured or unsecured loan?
- Will your credit score affect your borrowing capacity?
- How much can you afford to pay over the loan term?
- Would a lower interest rate, or flexible repayment options be preferable with your budget?
- Are you looking to repay the loan early and have a personal loan as a cash flow tool?
Does your credit score matter with getting a car or personal loan?
Your credit score could matter with your decision making about getting a car loan vs a personal loan. Keep in mind if you have a poor credit score, you may find it more difficult to get a loan approved compared to someone with a good credit score. A low credit score could also make it harder to get a low interest rate for the loan, as the lender could see you as a risky borrower. If you do get approved for a loan and make repayments regularly and on time, this could help your credit score over the longer term, but if you get repeatedly rejected for loans, this could get reported on your credit report and potentially influence your credit score. You can find out your credit score for free with Canstar.
Cover image source: Dragana Gordic/Shutterstock.com
This article was reviewed by our Content Editor Alasdair Duncan before it was updated, as part of our fact-checking process.

The comparison rates for car loans are based on credit of $30,000 and a term of 5 years, unsecured, unless otherwise stated.
^WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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