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    Car loans vs personal loans: what’s the difference?

    Posted on September 28, 2016 3:38 pm

    Car loans vs Personal Loans

    If you’re thinking about buying a car on finance, you might be trying to weigh up the pros and cons of car loans vs personal loans. Before you go ahead and buy a car, you should know the difference between the two.

    Here are the pros and cons of both finance options for buying a car.

    Firstly, is buying a car on finance a good idea?

    For many people, buying a car is the second biggest investment they make after buying a house. There are a number of considerations for anyone looking at financing a car purchase.

    For example:

    • the cost of the loan (such as the total interest to pay over the term of the loan, administration and management costs)
    • repayment options (for example, how long it might take to repay the loan, what happens if you want to repay the loan early)
    • any limitations on your purchase (for example, financing through a car dealership)
    • secured versus unsecured loans and what it means for you.

    For a quick look at different interest rates currently available, check out this article from Interest.co.nz.

    Car financing vs. a car loan

    These terms often get used interchangeably but it’s useful to understand the difference.

    Car dealerships offer car financing. The dealership will probably have a relationship with one or two finance companies, and while the interest rates may be competitive, the term of the loan may be fixed. You may also find the financing is only available for cars over a certain value or for new cars. Getting car financing via a dealership will often require a deposit, and the financing will be secured against the car.

    If you prefer to organise your car finance yourself, you can shop around for a car loan. You can use a broker, who’ll have access to a wide range of lenders, or go directly to a bank or other lender yourself. The interest rates could well be competitive, but may be higher than car financing through a dealership. The car will be used as security for the loan.

    You may be able to get a pre-approved car loan. This will put you in a good negotiating position if you go to a car dealership, but will also give you flexibility to purchase a car privately.

    Car loans vs personal loans

    A car loan is tied to you buying the car. A personal loan is a loan made to you that you are choosing to use to buy a car, instead of, for example, paying for a holiday. You will probably have more flexibility around the repayment terms, but the interest rates are likely to be higher.

    Secured vs unsecured car loan – understanding the difference

    Car financing and car loans are secured loans because they use the car as security against the loan. This means if you are unable to pay, the lender can take the car to recover the costs of the loan.

    A personal loan is typically unsecured, meaning the car is not used as security. As above, this is because you are choosing to use the loan to buy a car instead of, for example, paying for a holiday. Interest rates on unsecured loans are often higher because there is no asset for the lender to use to recover the costs of the loan if you’re unable to pay.

    The different types of car finance – a quick summary

    Dealership car financing

    • Approval upon purchase
    • Competitive rates
    • Car used as security on the loan
    • Generally little flexibility on repayment terms
    • May only be available on high value or new cars

    Car loan

    • May be pre-approved
    • Competitive rates
    • Car used as security on the loan
    • Flexibility depends on the lender
    • May be subject fees

    Personal loan

    • May be pre-approved
    • Flexibility of repayment terms
    • Car not used as security on the loan
    • Generally higher interest rates (if loan is unsecured)
    • May be subject to fees

    How a broker can help

    There are a lot of options for financing your car purchase, each with different benefits and considerations. A broker can help you work out which option is best for you. If you’re looking at buying a vehicle and want more information, or have more questions about financing your car, we’re happy to help. Get in touch today.