Personal loans versus car loans

Personal loans versus car loans

If you are looking to finance a car – your only option is a car loan, right? Wrong.

Despite missing the ‘car’ in the title, a personal loan can be used for a range of loan requirements, including to finance a new car. But which loan is going to suit you best, a personal loan or a car loan?

Personal loans

Personal loans are available for those wanting to borrow money to finance something they don’t have the funds for upfront – that doesn’t include a home. This could be for a holiday, study, renovations or to purchase a car.

Personal loans allow you to borrow an agreed amount, which you pay off weekly, fortnight or monthly until the end of the agreed loan term. But remember, the longer the loan term, the more money you will pay in interest – so take this into account when you are calculating your repayments and term length. 

You will have a choice of secured and unsecured loans options – with a secured loan usually offering lower interest rates as the loan is secured against an asset, in case you are unable to make the loan repayments. You also have the flexibility to choose between a fixed and variable interest rate.

If you are taking out a loan for a car, look at the interest rates, fees, repayment options and the early exit penalties when you are comparing loans.

Car loans

Put simply, a car loan is a personal loan. But whereas a personal loan will allow you to borrow the funds for a variety of purposes, car loans are specifically designed for the purchase of a new or used car only.

The main difference between the two is that car loans are almost always fixed rate loans – so your interest rate will be locked in for the length of the loan term you agreed too. That’s why it’s important to compare a range of car and personal loans so you find a low interest rate at the very beginning of your loan term.

Car loan terms vary from one to five years and will be determined, along with your repayment amount and regularity, at the beginning of your contract. You are then required to pay off the loan in the specified time. If you fall behind on your repayments you will be required to make a lump sum payment at the end of the loan term, which is where some borrowers can get into strife and require refinancing.

Remember, while car fixed rate loans offer you the ability to budget and pay off your loan progressively over the term – they will very rarely offer any flexibility either. So if you come into money and want to pay off the car earlier – you may not be able to, without incurring hefty penalties, on a fixed rate loan.

When you are in a dealership it can be hard to walk away from the convenience of an onsite car finance department but understand that you are still in a position to negotiate on the interest rates being offered to you and to shop around for a better loan rate.

You decide

When deciding between a personal loan or a car loan make sure you take into consideration the interest rates, fees, repayment restrictions, loan flexibility and the terms and conditions.

Remember, financing your new car purchase is only part of the costs you will incur so don’t forget to factor in the on road costs – such as registration fees, fuel, services and car insurance.

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Learn more about personal loans

Should I get a fixed or variable personal loan?

Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.

A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

What is the average interest rate on personal loans for single parents?

Like other types of personal loans, the average interest rate for personal loans for single parents changes regularly, as lenders add, remove, and vary their loan offers. The interest rate you’ll receive may depend on a range of different factors, including your loan amount, loan term, security, income, and credit score.

Can you refinance a $5000 personal loan?

Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.

If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.

Are there low doc personal loans?

Self-employed borrowers may be eligible for low doc personal loans, which require less documentation in their application process than many other personal loan options.

It’s important to remember that though low doc personal loans may require less paperwork, you may need to provide additional security, or pay a higher interest rate.

Can unemployed single parents get personal loans?

It can be more difficult for unemployed borrowers to successfully apply for a personal loan. Most lenders require borrowers to have a regular income available to cover the cost of loan repayments.

If you’re self-employed, or if less than half of your income comes from Centrelink, you may not be eligible for some personal loan options. Consider contacting the lender before applying.

Will comprehensive credit reporting change my credit score?

Comprehensive credit reporting may change your credit score, either positively or negatively, depending on an individual's situation.

Under comprehensive credit reporting, credit providers will share more information, both positive and negative, about how you and other Australians manage credit products. That means credit reporting bureaus will be able to make a more thorough assessment of everyone’s credit behaviour. That will lead to higher scores for some consumers and lower scores for others.

What do single parents need for a personal loan application?

Much like applying for other personal loans, applying for personal loans for single parents will likely require the following:

  • Proof of identity
  • Proof of residence
  • Proof of income
  • Details of assets (e.g. car, home)
  • Details of liabilities (e.g. credit cards, other loans)
  • Loan amount
  • Loan term

Can students with no credit history get loans?

It is possible for students with no available history of borrowing or managing money to get a personal loan, though it may be more difficult as well as expensive than for borrowers with a good credit history.

Having no credit history means having no credit score. While many lenders may consider having no credit score to be better than having a bad credit score, they may still consider it riskier to lend to an unknown borrower and may charge higher interest rates or fees than to borrowers with good credit scores.

Can you pay off a quick loan early?

Many lenders will allow you to make extra repayments onto a quick personal loan when you can afford them, or even exit the loan early, which can help reduce the total interest you are charged. Be sure to check your quick loan’s terms and conditions, as some lenders charge early exit fees for paying off a loan ahead of schedule.

Is it hard to improve your credit score?

It can be hard to improve your credit score, as it usually requires sacrifice and discipline, but hard doesn’t necessarily mean complicated. Some simple ways you can give your credit score a boost include closing extra credit cards, reducing your credit card limit, pay off any loans and make loan repayments on time.

As a general rule, the lower your credit score, the more remedies you can apply and the greater the scope for improvement.

Can I get a $2000 loan on Centrelink?

If more than half of your income comes from Centrelink benefits, it may be more difficult to have a $2000 loan application approved. Many lenders will check if you can afford a loan’s repayments on the income from your job before they’ll approve an application, and many won’t count Centrelink payments when assessing your income for this purpose.

Some lenders may offer $2000 loans to borrowers on Centrelink – consider contacting potential lenders to check before applying.

What can I use a bad credit personal loan for?

Generally, bad credit personal loans can be used for the following purposes:

  • Debt consolidation
  • Paying bills
  • Buying vehicles
  • Moving expenses
  • Holidays
  • Weddings
  • Education

Some lenders restrict how their bad credit personal loans can be used as part of their commitment to responsible lending – be sure to check before applying.

What documentation is needed for a self-employed personal loan?

Personal loans may require a borrower to provide proof of identity, proof of residence, details of any other outstanding loans (including credit cards), details of assets they own (e.g. savings, car, property), and proof of income.

While borrowers in full-time or part-time employment can often provide payslips and similar documents to prove their income, self-employed borrowers may need to provide other documents, such as bank statements or tax returns, to demonstrate that their income can cover a loan’s repayments.