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What’s the Difference Between a Car Loan and a Personal Loan?

Posted 21 Sep by

Sydney resident, Luke asks

“I want to buy my first car. Should I take out a personal loan? What’s the difference between a car loan and a personal loan?


Great question Luke, and one we get a lot here at Mortgage World.

Typically, a car loan is secured by the motor vehicle you are financing, and interest rates are generally lower than personal loans. This is due to the lender having security, your car, and is able to repossess this asset to recoup funds in the event you default on repayments. A car loan is often considered easier to secure because security is offered against the loan.

Personal loans are generally unsecured and can be used to purchase a car. Personal loans are commonly used to purchase vehicles on a private sale or older model vehicles, however, some lenders will have limitations on the age of the vehicle that you can finance. For example, the lender will stipulate that the vehicle should be no more than 10 or 12 years old by the end of the loan term.

A car loan cannot be used to purchase imported vehicles mainly due to the fact that the vehicle is not registered or locally compliant. This represents greater risk for a lender and in order to finance a car bought from Japan for example, a personal loan would be a suitable option.

Do I need substantial savings in order to qualify for a car loan?

You do not necessarily need large savings in order to qualify for a car loan. It is possible to finance 100% of the purchase price, even more than 100% if you’re upgrading. For example, if you are trading in an existing car with a residual and the trade-in is not going to cover the existing loan amount then it may be possible to borrow more than 100% of the new car value. The existing loan would be incorporated into the new loan terms, so you would not necessarily need a deposit in this instance. A deposit may secure a better rate, but you don’t necessarily need it. What you will need to provide is proof of sufficient income to show you can afford the loan repayments.

Both car loans and personal loans, depending on the lender, offer terms between 5-7 years. Car loans may offer the borrower attractive features such as balloon payment options. If you are looking to reduce your monthly repayments residual or balloon payments may be a suitable option.

The residuals are based on ATO guidelines, but as an example, if you financed $30,000, with a residual of $10,000, repayments are only calculated on $20,000, resulting in a reduced monthly repayment. At the end of your loan term, you’d be required to pay the outstanding $10,000 lump sum. What a lender may do at this point is trade the vehicle in and pay up the loan as the trade-in value or residual of the trade-in value.

Looking to buy a car?

Mortgage World Australia has been helping young people buy their first cars since 2001. Get the car you want, along with clear and easy to understand advice. Our team have access to a large collection of lenders who can accommodate finance for most borrowers needs. Whether you’re looking to buy your first car, or upgrade, or you’re just after a new car give us a call we can help.

We look forward to hearing from you.

The information on this website was correct at the time of writing but lender policies are subject to frequent changes. It is for general information purposes only.Whilst we endeavour to keep the information up to date and correct we make no representations or warranty that the information is current and take no responsibility for any loss or inconvenience caused by a person or organisation relying on this information. We recommend you contact us before acting upon any of this information.