Although car loans are actually a type of personal loan, there are some minor differences between the two products. When it comes to buying a car, whether you choose to apply for a car loan or a personal loan will depend on a number of factors in terms of what you’re looking for.
Pros and cons of car loans
A car loan is usually a secured personal loan. The car itself is used as security for the loan, so you want to make sure that you don’t miss any repayments. You can find variable rates and unsecured car loans as well – they just aren’t as common.
You will generally find fixed rates instead of variable rates when it comes to car loans. The benefits of a fixed rate include that you have the ability to budget with an assurance that the rate will not change for the length of your loan, say 1-5 years.
The downside to a fixed rate is that it doesn’t offer any flexibility in regards to repayments. So if you bought a Scratchie ticket and won the Gold Lotto, you might want to pay off the rest of your loan, but you may have to pay an early termination fee.
Interest rates on car loans on the Canstar database currently range from a minimum of 4.61% p.a. up to 21.99% p.a.. The average interest rate is 10.30% p.a. as of our November 2016 star ratings.
Pros and cons of personal loans
A personal loan allows you to borrow for a wider variety of purposes, while car loans are usually restricted to only motor vehicles. You can use a personal loan for things like financing a holiday, a car, home renovations, or consolidating your debts..
Because of this extra range of purposes, personal loans have a lot more range of options:
- Fixed rate
- Variable rate
The benefit of being able to choose a secured loan is that they usually offer lower rates, because they are secured against an asset and are therefore a lower credit risk for the lender.
Interest rates on personal loans on the Canstar database currently include the following range as of our November 2016 star ratings:
The bottom line for consumers
Having said that a car loan is a type of personal loan, it’s like we’re comparing green apples to red apples – they are both types of apples that can help you buy a car.
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 needs. That decision essentially requires asking yourself a few easy questions:
- Do you want a fixed rate or variable rate loan?
- Would you prefer to have a secured or unsecured loan?
- How long do you want the loan to last?
- Would your budget do better with a lower interest rate, or flexible repayment options?
- Are you looking to repay the loan early and having the personal loan more as a cash flow tool?
You just need to know what you are looking for. After that, we’re here to help. CANSTAR regularly compares what’s on offer when it comes to personal loans and car loans, and you can use our website to compare your options: