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Can I use a personal loan to buy a car?

Can I use a personal loan to buy a car?

If you’re getting a loan to purchase a new set of wheels, a car loan is not your only option. You can also use a personal loan to finance your purchase. So what’s the difference between the two, and why would you choose one over the other? Let’s find out.

Car loans vs personal loans

A car loan is not very different from a personal loan. However, as the name implies, a car loan can only be used to purchase a new or an old car. On the other hand, a personal loan will allow you to borrow funds for various purposes, including your upcoming holiday or purchasing a vehicle.

Lenders also have stringent criteria and restrictions around car loans. For example, most car loans are secured. It means you’ll most likely be required to use your car as collateral, and the lender may seize your vehicle if you default on repayments. Some lenders also won’t allow you to purchase a used vehicle past a certain age, which might restrict your options if you’re shopping on a budget.

A personal loan, on the other hand, can either be secured or unsecured. An unsecured personal loan doesn’t require any kind of collateral, but you might have to pay a higher interest rate if you’re getting an unsecured personal loan for a car. Having said that, a good credit score and financial history might help you negotiate a better rate with your lender. You can also get a personal loan to buy a used car. You don’t need to specifically say what you’re buying when you take out a personal loan, meaning you can get a car of your choice without any restrictions from the lender.

If you’re confused between a car loan and a personal loan to finance your car, also consider the type of interest rate you’re most comfortable with. The majority of car loans have a fixed interest rate, while you can find plenty of options for both fixed-rate and variable-rate personal loans. 

The advantage of getting a fixed-rate car loan is that you’re going to make the same monthly or fortnightly repayment throughout the fixed term. Having steady repayments makes it easier to budget, but you might find yourself paying more than the market rate if the variable interest rates go down. Meanwhile, with a variable interest rate, you could potentially save money in a low rate environment - or pay more if your lender announces a rate hike. 

Overall, a fixed rate car loan does offer you the ability to budget and pay down your loan steadily over the term. However, you’ll perhaps find it hard to get a car loan that’s flexible at the same time. So, if you happen to have some extra dollars at some point in time and decide to pay off the car earlier, you might not be able to do so on a fixed-rate loan without incurring fees.

The bottom-line

The decision to get a personal loan for a car or sticking to a car loan or dealership finance can be tricky. Buyers need to consider several factors, including the interest rate and payment terms. Your credit history might also impact your decision. That’s because personal loans are more easily approved for creditworthy borrowers who may also enjoy more competitive rates than individuals with an average score.

However, if you’re going for a regular car loan, an average credit history won’t necessarily stand in the way of approval. In addition, as the interest rate and the borrowing for a car loan also depend on the price of the car, your credit score might have a lower impact on key loan terms compared to a personal loan. 

Don’t forget to consider the interest rates for both car loans and personal loans to compare which one is more affordable before opting for dealership finance. Getting your car financed by the dealer is usually quick and convenient, but might cost you more in the long run. It’s always a good idea to compare rates and deals between multiple lenders as it increases your chances of landing a more competitive deal with reasonable terms.

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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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Learn more about personal loans

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.

Can I get a personal loan if I receive Centrelink payments?

It is hard, but not impossible, to qualify for a personal loan if you receive Centrelink payments.

Some lenders won’t lend money to people who are on welfare. However, other lenders will simply consider Centrelink payments as another factor to weigh up when they assess a person’s capacity to repay a loan. You should check with any prospective lender about their criteria before making a personal loan application.

How are personal loans regulated?

Personal lenders in Australia are regulated by ASIC (the Australian Securities & Investments Commission) and must follow responsible lending rules. That means they can’t lend money without making “reasonable inquiries” about a borrower’s financial situation and ensuring the loan is “not unsuitable” for them.

How long do personal loans take?

Depending on the lender, some personal loan applications can be approved in as little as one hour, or you may need to wait until the next business day. If approved, you may receive your money on the same day, the next business day, or within the week.

Where can I get a personal loan?

The Australian personal loans market contains dozens of lenders offering several hundred different products. Personal loans are available through a range of institutions, including:

There are three main ways to access personal loans. You can go through a comparison website, such as RateCity. You can use a finance broker. Or you can directly contact the lender.

What are the pros and cons of personal loans?

The advantages of personal loans are that they’re easier to obtain than mortgages and usually have lower interest rates than credit cards.

One disadvantage with personal loans is that you have to go through a formal application process, unlike when you borrow money on your credit card. Another disadvantage is that you’ll be charged a higher interest rate than if you borrowed the money as part of a mortgage.

Is a personal loan a variable or fixed-rate loan?

Depending on the personal loan lender, you may be able to choose between a fixed and a variable interest rate. But, there are a few distinct differences between the two, so it’s important to weigh up the pros and cons before deciding on what’s right for you.

A fixed interest rate loan gets you the convenience of knowing exactly how much you need to repay each fortnight or month. On the other hand, you generally won’t be able to make lump sum or advanced payments to close your personal loan early - or at least not without a penalty.

With a variable interest rate personal loan, you may be able to get a longer loan repayment term, with the option of paying off the loan early. You typically won’t need to pay any additional charges for an early full repayment either. The potential disadvantage with an interest rate that can change is that your repayment is not entirely predictable, as it can fluctuate with the market. However, you’ll likely have more options as more lenders offer a variable interest rate personal loan.

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.

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.

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.

What is a bad credit personal loan?

A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.

Does refinancing a personal loan hurt your credit score?

Personal loan refinancing means taking out a new loan with more desirable terms in order to access a more competitive interest rate, longer loan term, better features, or even to consolidate debts.

In some situations, refinancing a personal loan can improve your credit score, while in others, it may have a negative impact. If you refinance multiple loans by consolidating these into one loan, it could improve your credit score as you’ll have only one outstanding debt liability. Your credit may also improve if you consistently pay the instalments on time.

However, applying to refinance with multiple lenders could negatively affect your credit if your applications are rejected. Also, if you delay or default the repayment, your credit score reduces.

Can I merge my personal loan with my home loan?

Yes, you can refinance your home loan and, in the process, merge or consolidate your personal loan and home loan. By doing so, you can lower the number of debts you have, and you may also reduce the total interest you have to pay.

However, you should consult a financial advisor or a mortgage broker to confirm that you are decreasing your total outstanding debt, including interest payments. The repayment term for a home loan can be much longer than that for a personal loan, and by merging the two, you could be repaying a higher amount over the full term.

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.