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.

Which lenders offer bad credit personal loans?

Several dozen lenders offer bad credit personal loans in Australia. These are generally smaller lenders that aren’t household names.

How do I consolidate my debt if I have bad credit?

The worse your credit history, the harder you will find it to consolidate your debts, because lenders will be less willing to lend you money and will charge you higher interest rates.

However, people with bad credit histories can make debt consolidation work by following this three-step process:

  1. First, find a lender willing to give you a bad credit personal loan. This process will be simplified if you go through a finance broker or use a comparison website like RateCity.
  2. Second, make sure the interest repayments on your new loan are less than the repayments on the loans being replaced.
  3. Third, instead of spending those savings, use them to pay off the new loan.

What interest rates are charged for personal loans?

Lenders aren’t allowed to charge interest on loans of $2,000 and under. Instead, they make their money by charging a one-off establishment fee of up to 20 per cent and a monthly account-keeping fee of up to four per cent. Lenders might also ask you to pay a government fee.

For loans between $2,001 and $5,000, lenders can make their money in only two ways: a one-off fee of $400 and annual interest rates of up to 48 per cent.

For loans of $5,001 and above, or for loans that have terms longer than two years, lenders can charge annual interest rates of up to 48 per cent.

Those fee caps don’t apply to loans offered by authorised deposit-taking institutions such as banks, building societies or credit unions, although such institutions are highly unlikely to charge interest rates of anywhere near 48 per cent.

Can I get guaranteed approval for a bad credit personal loan?

Few, if any, lenders would be willing to give guaranteed approval for a bad credit personal loan. Borrowers with bad credit histories can have more complicated financial circumstances than other borrowers, so lenders will want time to study your application. 

It’s all about risk. When someone applies for a personal loan, the lender evaluates how likely that borrower would be to repay the money. Lenders are more willing to give personal loans to borrowers with good credit than bad credit because there’s a higher likelihood that the personal loan will be repaid. 

So a borrower with good credit is more likely to have a loan approved and to be approved faster, while a borrower with bad credit is less likely to have a loan approved and, if they are approved, may be approved slower.

How do I find out my credit rating/score?

You're entitled to one free credit report per year from credit reporting bodies like Equifax, Dun & Bradstreet, Experian and the Tasmanian Collection Service. You can also get a free report if you’ve been refused credit in the past 90 days.

Credit reporting bodies have up to 10 days to provide reports. If you want to access your report sooner, you’ll probably have to pay.

What is credit history?

Your credit history covers everything to do with applying for loans. It includes the number of loans you’ve applied for, the amounts you’ve borrowed and your record of meeting repayment schedules.

How do I know if I've got a bad credit history?

You can find out what your credit history looks like by accessing what's known as your credit rating or credit score. You're also able to check your credit report for free once per year.

What causes bad credit history?

Bad credit history is caused by filing for bankruptcy, defaulting on your debts, falling behind on your repayments and having loan applications rejected. Lenders are wary of borrowers who demonstrate this sort of behaviour because it suggests they might struggle to repay future loans.

Borrowers with bad credit may find it more difficult to be approved for a loan, or they may get higher interest rates when they do get approved.

What is an unsecured bad credit personal loan?

A bad credit personal loan is ‘unsecured’ when the borrower doesn’t offer up an asset, such as a car or jewellery, as collateral or security. Lenders generally charge higher interest rates on unsecured loans than secured loans.

What is debt consolidation?

Debt consolidation is the process of rolling several old debts into one new debt, usually to save money or for the sake of convenience.