Car loans vs. Personal loans - What's the best way to go?
The next time you go out shopping for a car loan, you might be wondering if you should be getting yourself a car loan or a personal loan. So what is the difference?
A car loan differs from a personal loan with respect to what it can be used for. A car loan as the name suggests can only be used for the purpose of purchasing a car while a personal loan can be used for most legal purposes, and that definitely includes purchasing a car.
So which is better? Well, actually there is not much of a difference between the two in terms of costs. But you should look out for four key things in either case:
Interest rates are the big cost driver
The most important and obvious consideration is the interest rate. Deciding between a variable rate and a fixed rate will depend on your personal and financial preferences. Ask yourself questions like:
- Is there a chance you will pay off the loan sooner rather than later? If so, go variable.
- Are you trying to minimize your payment over as long a term as possible? If so, consider longer term options.
Big price difference between secured and unsecured loans
Once you know whether to fix or go variable, think hard about secured versus unsecured. That's where the big difference lies. Unsecured personal loans attract an average interest rate of 2% higher than its secured peers, and that's because if you run into trouble with an unsecured loan the lender does not have the value of the car to rely on worse case. However here is this hitch. Most major banks do not offer a 'car loan' product specifically designed to be secured by your car. Instead they will offer you an unsecured loan which can be used to finance a car purchase but will cost you up to 2% more than a secured car loan would have. Having said that, if you go with a secured loan then you will need to take out comprehensive car insurance as well.
You might argue that a car offers limited security because it has wheels after all! Well, many credit unions beg to differ - by offering better rates on secured options.
Fees can be large
Fees may also greatly increase the costs of your car loan and this relates to both application and ongoing fees. Application or establishment fees on car loans can be very significant and these may be as high as $250. Imagine the impact it will have on you if you are only thinking of borrowing a small amount of money to finance your car. You should also be looking out for ongoing fees and they are normally charged on a monthly or annual basis. Some personal and car loans have monthly fees as high as ten dollars so read the fine print.
Surprise - there are hidden penalties
If you think interest rates and fees is all that you need to consider before you sign up for a car loan, wait, there might be penalties tagged on as well! Common car loans penalties include 'early repayment penalties' if you pay off the loan sooner rather than later and 'missed payment penalties' if you fail to make a payment on time
So remember, before you rush out to get yourself a car loan, apart from the interest charged on your car loans, you might also want to consider avoiding:
- Application fees
- Ongoing monthly or annual fees
- Early repayment penalties
- Missed payment penalties
Here are some of the car loans with the lowest rates available:
Cheapest Car Loans
| Company | Product | Rate | Rate Fixed or Variable | Minimum loan amount | Application/establishment fee |
|---|---|---|---|---|---|
| Hunter United Credit Union | Overdrive CarLn 6mth Fixed | 7.45% | Fixed | No min | $100 |
| Defence Force Credit Union | New Car Loan | 7.50% | Variable | No min | $50 |
| Savings & Loans CU SA | Breathe Easy Car Loan | 7.59% | Fixed | $10,000 | $145 |
| Australian Defence Credit Union | New Car Loan | 7.75% | Variable | $5,000 | $75 |
| Heritage Building Soc | Cake & Eat It Loan | 7.83% | Variable | $5,000 | $95 |
| Satisfac Credit Union | 4 Cylinder Car Loan | 7.90% | Fixed | $5,000 | $100 |
| Horizon Credit Union | New Car Loan Variable | 7.95% | Variable | No min | $100 |
| NSW Teachers Credit Union | New Car Loan-Unsecured | 7.95% | Variable | $2,000 | $0 |
| Powerstate Credit Union | Car Loan Fixed Secured | 7.95% | Fixed | $5,000 | $120 |
| Powerstate Credit Union | Personal Loan Fixed Secured | 7.95% | Fixed | $5,000 | $0 |
| Source: CANSTAR CANNEX 25/07/2007 | |||||
Use our easy search tools to compare car loans at RateCity.
SEARCH BY: