Car Loans and Personal Loans – Which Should You Choose When Buying a Car?

There are several different sources of finance available when it comes to buying a car, the two main types being car loans and personal loans. Whilst you are able to use both loans to buy a car, there are still several differences between the two.

A personal loan is the most basic of all loans available. Put simply, money is borrowed but must be repaid (with interest charged) over the agreed term of the loan. You can use a personal loan to purchase practically anything from cars and motorboats to holidays and home entertainment products. The money borrowed can even be used to make home renovations or to pay for university tuition fees.

A car loan on the other hand can only be used to purchase a car. Even in light of the limitations of how funds may be used it is important to note that a car loan, compared to a personal loan will not differ greatly in price.

When selecting a product the first thing you should look at is the interest rate. There are two different rate types you can choose from; a fixed rate or variable rate. Both rate types have different repayment structures and the one you select should reflect on your repayment habit. Variable rates will fluctuate alongside the Reserve Bank rate. They are most suitable for people who pay off their debt quickly and who often make additional repayments. Fixed rates, as the name suggests, means that your rate will not alter if there is a rate rise (rate fall). They are a safer option for those who aren’t inclined to make additional repayments as it enables you to budget the amount to be repaid each month.

The next step is to decide on whether you want a secured or unsecured loan. A ‘secured’ loan means that the loan will be tied to something of value known as an asset. This can constitute a boat, car, or a term deposit. Your lender will use this as security if you fail to make your repayments on time. Unsecured loans such as the Citibank Unsecured Loan at 12.24% are the exact opposite and collateral free. Because your loan is not tired to an asset this then becomes a much riskier venture for your lender if you don’t make your repayments. So to compensate for this risk the interest rates charged on an unsecured loan average 2% higher than a secured loan. This can considerably increase the overall cost of your loan so make sure you are aware of your budget before committing.

Another factor to take into consideration is if there are any hidden penalties and charges. Having a lower rate can also mean that there are more restrictions to a product. Watch out for penalty fees if you wish to make additional repayments. You could also be hit with extra fees if you miss a payment period. You may also be charged a monthly servicing fee or a fee for purchasing the product known as an ‘establishment fee’ or an ‘application fee’.

Whichever product you decide to go with, always do some research and read the fine print (product disclosure statement) to make sure you know what you are getting into. There are now plenty of products available for you to compare online. Websites like RateCity.com.au will save you time and money as they endeavour to compare all the products available on the Australian market. The site is a great source for information and saves you having to run around town getting quotes.