Not as a rule. In the personal loan vs car loan decision, the thing that matters most is whether the loan is secured and what it's secured against. That shapes the rate you're likely to be offered and what's at stake if you can't repay.
The names are a less reliable guide. A car loan can be unsecured, a personal loan can be secured, and lenders label similar products in different ways. So the better question is which kind of loan fits this car and your situation.
What is the difference between a personal loan and a car loan?
Going by the names alone, less than you'd expect. A car loan may be secured or unsecured, depending on whether the car, or another asset, is put up as security. A personal loan may also be secured or unsecured. That's why the secured vs unsecured car loan question tells you more than the label does.
It leaves three kinds of loan to compare when you're buying a car: a secured car loan, a secured personal loan, and an unsecured loan, whether it's sold as a personal loan or a car loan. Legal Aid WA has a plain-English explanation of how secured and unsecured loans differ if you'd like more background.
How do the three options compare?
The columns below are comparison categories, not product names. Lenders label their loans differently, so a product one lender calls a car loan can belong in a different column from another lender's car loan, and some products overlap. The third column covers any unsecured loan, whether it's sold as a personal loan or a car loan.
Secured car loan | Secured personal loan | Unsecured loan (personal or car loan) | |
Security | The car you are buying | An asset the lender accepts, which may be the car | No asset is pledged as security |
Interest rate | Usually lower than an unsecured loan | Usually lower than an unsecured loan | Usually higher, because the lender carries more risk |
If you don't repay | The lender may be able to take possession of the car and sell it to recover some of the debt | The lender may be able to take possession of the secured asset and sell it to recover some of the debt | The debt remains enforceable; the lender needs a court order before it can take and sell assets |
These are general tendencies. The terms of any loan depend on the lender and on your contract, so read the table as a starting point for your questions.
When does a secured car loan tend to suit?
It tends to suit when the lender will accept the car you're buying as security, and you're comfortable with that car securing the loan. The practical test is the lender's criteria. Lenders usually apply their own conditions to a car offered as security, and those conditions differ, so the same car can be accepted by one lender and not by another.
That makes the car itself part of the decision. Before you settle on a loan type, find out whether the car you have in mind fits what the lender will take.
When does a personal loan tend to suit?
It depends which kind of personal loan you mean, because the two work differently.
Secured personal loans
A secured personal loan tends to suit when the security is an asset other than the car you're buying, or when a lender offers its secured lending under a personal loan name. In the table it sits beside the secured car loan, and the main difference is which asset is on the line. Our secured personal loans page explains how these are arranged.
Unsecured personal loans
An unsecured personal loan tends to suit when the car isn't accepted as security, or when you'd prefer not to pledge an asset. No asset is pledged as security; the debt remains enforceable. Unsecured loans can also be harder to get.
What else should you check before you choose?
Two things apply whichever column your loan falls in. The first is the comparison rate. ASIC explains that lenders must include a comparison rate when they advertise fixed-term consumer credit, and that it combines the interest rate with most fees and charges. It doesn't include all of them: government charges are left out, and so are charges that only apply in certain circumstances.
The second is the detail of the loan itself, and our guide to comparing car loan offers goes through how to read a quote. Ask:
- whether the rate is fixed or variable
- how long the loan runs
- what happens if you miss a repayment
- what the total cost is once fees and charges are added
- what you'd have to do to sell the car before a secured loan is repaid.
Common questions
Can you use a personal loan to buy a car from a private seller?
A personal loan is one option for a private purchase. A private sale doesn't decide the loan type by itself, though, and what's available varies by lender. Before you buy privately, check the Personal Property Securities Register to see whether the car has been used as security for a loan. If that loan hasn't been repaid and the borrower defaults, the credit provider may still be able to seize the car, even after it has been sold to you.
Does your credit history change which loan suits?
It can change what you're offered. Lenders have different criteria, so you may qualify with one and not with another, and credit history is one of the things they look at. If you've been turned down, ask the lender why.
Does the same apply to caravans, boats and jet skis?
Broadly, yes. The same three categories apply, with the caravan, boat or jet ski taking the place of the car as possible security. If it's a boat or a jet ski you're looking at, our boat and jet ski finance page covers the options.
Key Takeaways
- A personal loan isn't better or worse than a car loan as a rule. What secures the loan tells you more than its name.
- The three options are comparison categories. Lenders label products differently, and some overlap.
- Check whether the lender will accept the car as security before you settle on a loan type.
- Compare offers on the comparison rate, and remember it doesn't include every fee.
- Ask about the term, missed repayments, the total cost and selling the car early.
- Buying privately? Check the Personal Property Securities Register first.
Loans123 is a Perth finance broker that compares 30+ lenders. Not sure which way to go? Call 1800 079 147, or visit our car loans page to start an enquiry and speak to a broker about the options.
This article provides general information only. It does not constitute financial advice. Please consider your personal circumstances before making any financial decisions. Loans123 holds Australian Credit Licence 512846.
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Written by
Trent Cray
Finance Specialist, Loans 123
Trent is a Finance Specialist at Loans 123 in Victoria Park, Perth. He helps customers compare more than 30 lenders to find car, personal and business finance that suits their situation.
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