Which is better, a car loan or a personal loan?

When you are purchasing a car using finance there are several loan options available. This article explores the difference between getting a secured car loan or using a personal loan to purchase a car. Both types of loans have their pros and cons.

What is a secured car loan?

A car loan uses the car as security for the loan. This type of loan has less risk for the lender because, if by chance, something happens to you and you can no longer make your repayments, the lender can sell the car to pay out the loan and recoup their money.

There are 2 main types of car loans – those for wage earners and those who are business owners. A consumer or secured car loan are for wage earners. Proof of income is provided by current pay slips. No doc car loans, low doc car loans and full doc chattel mortgage car loans are business car finance options. To get a business car loan you must have an ABN and the vehicle must be used in the business. The amount and type of documentation is the main varying factor between these types of business car loan options.

Advantages of a car loan

• * Competitive interest rate due to there being less risk for the lender.

• * Have a pre-approved car loan before shopping around for a car.

• * Can have accessories, such as a tow bar or roof rack, included in the purchase price.

• * Deposit may not be required depending on your individual profile.

• * Fixed fortnightly or monthly repayments via direct debit.

• * Loan terms up to 7 years.

Disadvantages of a car loan

• * Cannot purchase older cars.

• * Cannot purchase unregistered cars.

• * Cannot purchase repairable write offs, such as hail damage vehicles.

What is a personal loan?

A personal loan can be used to purchase just about anything. There are 2 types of personal loan – secured and unsecured.

A secured personal loan uses an asset such as a car as security for the loan. This asset can be previously purchased and not encumbered. The funds are normally transferred straight to the applicants bank account and they can then utilise funds as they wish. A secured personal loan may be used to purchase a vehicle or asset that does not meet lenders criteria (too old). This provides flexibility of use of funds at a lower interest rate than an Unsecured personal loan offers.

An unsecured personal loan has no asset used a security for the loan. This type of loan is more risk to the lender as there is no asset to recoup funds if required. As there is more risk a higher interest rate is charged in comparison to a secured car loan.

Advantages of a personal loan

• * Flexible – you can purchase any type of asset or carry out home improvements, holidays etc.

• * Can purchase older vehicles that fall outside of lending criteria.

• * Loan terms up to 7 years.

• * Fixed interest rate for the term of the loan.

• * Nil or minimal exit fees.

Disadvantages of a personal loan

• * Higher interest rate which means you pay more over the life of the loan.

• * Amount of funds limited from $5,000 to $50,000.

Which type of loan is right for you?

When purchasing a vehicle using finance it is imperative that you get the right car loan to suit your particular circumstances. If you are buying a new or relatively new vehicle less than 10 or so years old, then a secured car loan is the best option. However, if the vehicle being purchased is older, has irregular modifications or is unregistered then a personal loan will be the best choice.

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