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Personal Loan vs Car Loan

Are you looking for a new car? Find out if you should opt for a car or personal loan.

08 January 2023Stephen Smyth 5 min read
If you are in the market for a new car, you may wonder if you should opt for a car loan or a personal loan.   Even though these loan instruments sound similar, they work entirely differently. Learning the differences is crucial for making the right choice. Here’s everything you need to know about them:

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If you are in the market for a new car, you may wonder if you should opt for a car loan or a personal loan.

Even though these loan instruments sound similar, they work entirely differently. Learning the differences is crucial for making the right choice. Here’s everything you need to know about them:

Personal loans or personal financing loans are a versatile type of financial assistance that borrowers can use for a variety of end uses. These include paying for a holiday, undertaking a home renovation, paying unexpected bills, or financing a wedding. You can also use the proceeds of a personal loan to buy a car.

Such loans work as any traditional loan -- you borrow a specified sum of money, and you need to repay it on a fortnightly or monthly basis for anywhere between one to seven years. You also need to pay the interest and processing fees, if any, charged by the lender.

Personal loans are extremely attractive to borrowers as there are no end-use restrictions. Moreover, such loans are usually unsecured, and the turnaround time for approving the loan application is quicker than for secured loans. You also need to furnish fewer documents in support of your application. However, the absence of a secured asset means the lender charges a higher interest on such loans.

Like other loan applications, your credit score is a factor that’s considered by lenders while evaluating your loan application. However, it is difficult to pinpoint the minimum credit score for personal loan in Australia as the requirements vary depending on the lender you are approaching.

Before you sign up for a personal loan, here are some pros and cons you should consider:


  • A personal loan provides an extra boost to your cash flow, and you can use the proceeds to meet any expenses since there is no restriction on the end use
  • Most personal loans are unsecured, and you don’t have to furnish any collateral to borrow funds
  • The processing time of a personal loan application is lesser compared to traditional loans
  • You can receive the entire loan payment in a single shot
  • Typically, personal loans carry a lower interest rate compared to credit cards


  • Lenders may impose additional fees and penalties to square off the lending risk without taking any security. This can increase the overall cost of borrowing.
  • If you are not careful, you may fall into a debt cycle and find yourself continuously borrowing a personal loan to pay off other debts.
  • Personal loans for bad credit are easier to get but they often come with a higher interest rate

Getting a loan for a car involves lenders extending financial assistance to be used exclusively for purchasing a car. It also involves using your car as security for a loan. Legally, the lender owns the vehicle till you repay the final instalment. In case of any payment defaults, the lender can seize the car and sell it off to recover the dues. Unlike personal loans, the proceeds of a car loan cannot be used for anything else apart from purchasing the car.

Your credit score is an important factor that decides how much you are eligible to borrow. However, the minimum credit score for car loan in Australia varies depending on the lender you are applying to. Even if you don’t have a perfect credit score, you may still be able to borrow a loan for purchasing a car by approaching lenders who offer bad credit car loans.

Can you choose between a secured vs unsecured car loan? In the world of auto loans, secured loans are the norm for lenders as it helps them to manage the risk of lending a considerable sum of money. If you are looking for an unsecured car loan, you may be forced to apply for a personal loan as they are the most convenient form of unsecured lending.

How to get a car loan that’s suited to your needs? Make sure to compare all the offers available in the market using a loan comparison calculator. But don’t forget to be realistic about how much you can afford to repay -- getting approved for a higher loan means little if you cannot pay off the debt on time.

Should I get a car loan? Here are some pros and cons to consider before you sign on the dotted line:


  • Compared to unsecured personal loans, car loans are available at a lower interest rate. This is one of the key benefits of getting a car loan instead of borrowing a personal loan to buy a car.
  • Loans against your car are offered at a fixed rate of interest. It helps you to work out the monthly instalments for the entire tenure of the loan even before you borrow and decide whether you can afford it.
  • Since a bank loan for car is a secured loan, you may be able to borrow a higher amount compared to what you are eligible to borrow when applying for an unsecured personal loan.
  • After you have borrowed a car loan, you can also opt for a refinance car loan to pay off the loan at a lower interest rate and modify the loan terms.


  • Car loan requirements usually specify that you can only use the proceeds for purchasing a brand-new or near-new condition car. Regular lenders may not have car loans specially designed for buying second-hand cars.
  • If you fail to repay the loan, you may lose the car.
  • Lenders are typically inflexible about the terms and conditions of the car. For instance, if you want to repay the loan ahead of its term, you may need to pay additional prepayment penalties.

The critical difference between car loans and personal loans is that while car loans are secured by the vehicle you purchase using the loan amount, personal loans do not require any collateral. As a result, you may lose possession of your car in case of any payment default on your car loan. But you do not run such a risk when you borrow a personal loan to buy a car.

There are also differences in the way in which personal loans vs car loans in Australia work:

Is the loan for a used car or a new car?

If you are planning to purchase a used car, a lender may not be willing to extend a car loan as the vehicle may not be in great shape, increasing the risk of lending. In such cases, a personal loan can be a better choice.

What is your credit score?

If you have a bad credit score, you may find it easier to get approved for a car loan than a personal loan. Since the lenders have security over the car, which can be sold off in the event of non-payment of the dues, they may be willing to consider you despite your credit score. To check credit score and where you stand as a borrower, sign up with ClearScore for free credit reports.

Do you have plans to modify the car once you purchase it?

If you have any plans of modifying the vehicle and debating between car finance vs personal loan, opting for a personal loan is a safer bet. Even if it is just a respray to change the car's colour, a car loan may not allow you to add the extra expense. Car loans are provided based on the car's market value, just as it is available in the showroom.

Wondering what’s the maximum amount you can borrow through a personal loan or car loan? There’s no straightforward answer to this, as lenders consider your financial history and credit score to arrive at a decision.

If you have a high credit score, a steady source of income, and no outstanding liabilities, the lender may approve your car loan application for the total amount, regardless of which model or make you choose. Similarly, even though there are no restrictions on the end use of a personal loan, your financial situation ultimately determines how much you are eligible to borrow.

Deciding between car finance vs personal loan depends on a variety of factors. More than evaluating the pros and cons of each financial product, it is important to ask yourself which is more suited to your current financial situation.

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Written by Stephen Smyth

Head of International Expansion

Stephen Smyth has worked in financial services since 1999, specialising in consumer credit. He has worked in banks and consumer credit companies in the United Kingdom, France, Spain, India, South African and has lived in Australia since 2013. He believes that people around the world can benefit from services liked ClearScore to make finances clearer, easier to understand and to find better deals to save money.