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Car Loan Vs Personal Loan: Which One is Better?

Car Loan Vs Personal Loan: What Is The Difference?

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If you have decided to purchase a car, then the only option that strikes you is a car loan. Correct? But were you aware that there is yet another method to finance your vehicle? A personal loan, which can be availed for a variety of financing requirements – a holiday, education fees, a new car, or renovation. However, you need to figure out which is best for you. So, what are the pros and cons of a car loan vs personal loan? In this blog we shall discuss these various aspects and try to make the decision easier for you.

Personal Loan: Definition, Benefits & Drawbacks

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A personal loan is a flexible option to borrow cash to finance various purposes – for which a borrower does not have enough cash to pay upfront. You can settle the loan through monthly instalments at the end of the loan tenure – that can either be short- or long-term. However, the longer the term, the lower the monthly amount but higher the interest paid. So we would advise to go for a short-term option and settle the amount as soon as possible.

Here, you are also offered the option between secured and unsecured loans. The former means that the lender will offer the loan against an asset – such as your home or vehicle. In this case, your asset will be seized if you fail to make the repayment within the stipulated time frame. The latter – which is often favoured by borrowers – is free from collateral requirements. In an unsecured loan, the interest rates (which can be variable or fixed) are usually higher and approval conditions are more stringent. This means you need to have an excellent credit score.

So here is a gist of the major pros and cons when you choose a personal loan to finance your car:


  • Flexible interest rates and repayment options
  • No restrictions on utilisation of funds


  • Stringent pre-approval requirements such as high credit score and background check
  • Interest rates likely to be on the higher side


Car Loan: Definition, Benefits & Drawbacks

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Car loan is essentially a secured loan – or a type of personal loan – in which your vehicle serves as the collateral. In this case, since the lender is at a comparatively advantageous position, he is likely to lower your interest rate. However, here, the rates are fixed and the loan is to be repaid over a fixed term as decided between the borrower and the lender. This option does not require an applicant to have a high credit score; a higher than average rating works just fine. Neither does your credit score have much effect on the interest rate or borrowed amount – which depends on the price of the vehicle purchased.

Moreover, a car loan comes with added benefits and flexibility on repayment options such as a balloon payment. To know more about this option, read our blog on – what is a balloon payment on car financeFurther details about its various advantages and disadvantages can be gathered from our extensive article here.

Summing up the major benefits and limitations of a car loan, we see that:


  • No requirement of high credit score
  • Quick and convenient on-the-spot solution
  • Lower interest rates


  • Usually requires an upfront deposit amount
  • Full ownership of car is not guaranteed until loan amount is completely paid


Car Loan Vs Personal Loan: Which One Is Better In Case You Are Buying A Used Car?

Have you ever considered buying a second hand vehicle or equipment? If you are opting for a second hand car, then a personal loan comes handy. Let us explain why. The loan amount for a used vehicle is governed by three factors  – age, model, and condition of your car. Not only this, the interest rates are usually higher in this scenario  – almost at par with rates for personal loans. The total loan amount sanctioned by most lenders is generally only 80-90% of the total car value.


For example, if the dealer quotes the price of the used car as AUD 30,000 and your bank offers 90% of the loan, i.e. AUD 27,000, then the remaining amount has to be borne by you along with your down payment. However, if you apply for a personal loan of AUD 30,000, you can cover the entire cost without spending much from your pocket.


The tenure of loan offered for a personal loan is often higher than that for a used car loan. Therefore, summing it all up, a personal loan seems to be a better option when you go for for a second hand vehicle. Nevertheless, you still need to have an excellent credit score to avail its approval.

Conclusion: So What Should A Borrower Opt For? Car Loan Or Personal Loan?

The first obvious choice when buying a new vehicle is certainly car loan since it gets easily sanctioned through the broker. In fact, a car loan even comes with tempting offers such as zero interest car finance. However, you can still consider the pros and cons of a car loan vs personal loan and weigh the latter as an option according to your circumstances. Visit different banks, research the various options of loan terms and rates before making a choice. Ask yourself the following questions:

  • What is my desirable interest rate option? Variable or fixed?
  • Can I afford a secured loan? Should I apply for an unsecured loan instead?
  • What should be my loan tenure?
  • Do I want a flexible repayment option or lower interest rate?

You need to be certain about what you are looking for. Check your credit score, current interest rates, and collateral requirements before arriving at a decision.

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