Personal Loan vs Car Loan: What’s the best way to finance a new vehicle?

Buying your first car ever? Upsizing or downsizing your vehicle? Upgrading to a newer, more reliable model? There are many reasons why people choose to buy a car, and for many, it’s an essential purchase, rather than a luxury item. Regardless of the type of vehicle you buy, a car is an expensive purchase, and often a significant investment (in the sense that a car gets you to work every day, or you’re likely to have it a number of years).

We can help you navigate that second-hand car purchase, but often the biggest question for people is how they will finance it. Much like buying a home, or an expensive piece of tech or whiteware, many people don’t have the savings available to pay cash upfront.  A new car purchase can often be prompted by an unexpected car breakdown, or an accident where your current vehicle is written off or is too expensive to repair.

Common ways to finance a new car purchase are a personal loan and auto finance. Let’s take a look at how these differ and the advantages and pitfalls of these options.

Blurred car dealer holding out car keys in focus as if offering you the keys to a new vehicle.

What’s the difference between a personal loan and a car loan?

A personal loan can be used for lots of different things. People take out a personal loan for a special holiday, a wedding, a small home renovation, or a new car. Typically people use personal loans for one-off expenses and unexpected purchases that crop up from time to time. Personal loans can be secured or unsecured. A secured personal loan means that the asset(s) you purchase with the loan, is secured against it. In the instance of a vehicle, if you used a secured loan to finance it, the car could be sold if you started missing your loan repayments.

A car loan is organised directly with a bank or vehicle seller for the specific purpose of buying a car. A car loan can be a type of personal loan but has more restrictions than a standard personal loan.

Car finance using a personal loan

If you’re sourcing your new vehicle through a car dealer, you’re likely to be offered car finance. Often, this isn’t the cheapest option available – it is definitely worth exploring other finance options through your bank, or a personal finance company both of which are likely to have more competitive interest rates. Lenders such as banks and personal finance companies tend to offer unsecured personal loans, so you don’t need to have any collateral, or an asset, to secure your loan.

Get personalised and competitive interest rates

A personal finance company, such as Nectar, can take into account your unique circumstances when you take out a personal loan for a car. In addition to lower interest rates than dealer car finance, a lender such as Nectar, can provide online confirmation of your loan interest rate and repayment options in minutes, and promise no hidden fees or charges.

The importance of having good credit

Your credit score determines how creditworthy you are, and the risk you pose to a lender who is deciding to lend you money. Your credit score can influence the amount you borrow and the interest rate you are charged. Lenders and utility companies can also assess your credit score when processing any requests for finance or services. Maintaining a good credit score by making any loan repayments on time is good financial practice.

Covering your related costs

By applying for a personal loan for your new vehicle, you aren’t just restricted to purchasing the vehicle itself. Perhaps your new vehicle needs new tyres, a paint touch up, or a new car stereo. A personal loan can also be used for these extras. A car loan can only be used for the car purchase itself, so it does have more restricted use.

Pre-qualified loans so you can start shopping

A finance company such as Nectar will allow you to get a pre-qualification for your personal loan before you start car shopping and get carried away with your budget. Knowing how much you have to spend can also help you broaden your search for a second-hand car. You’ll no longer be restricted to car dealers, but be able to look for private deals through friends, family and online sites such as Trade Me. These car transactions can often be cheaper, as car dealers have the higher overheads of a physical location and staff. By getting a cheaper car purchase, you’ll have less to finance, will pay less interest and can pay off your loan faster.

Young man wearing a cap and tshirt in the drivers seat steering a car at golden hour

Car finance using a car loan

It is generally well known that getting car finance with a car dealership is a secured loan. This means that your new car, or another asset such as your home, will need to be secured against the car finance loan. If you pay your loan repayments on time, every time, this isn’t an issue, but if you don’t and default on the loan, the car finance company can sell the asset you’ve offered as security to cover the amount owing to them.

Car dealers often have preferred lenders

Your local car dealership is likely to have agreements with a few selected lenders. The arrangements they have in place are likely to benefit the car dealership, rather than offer car buyers the most competitive interest rates in town. By considering other finance options, you’re likely to find a better deal elsewhere.

Less flexible car loans

When you apply for finance with a car dealership, the finance you’re requesting is purely for the purchase of the vehicle. If there are other upfront costs, you’ll need to pay for these out of your own money. Any repairs, general maintenance and upgrades won’t be covered in a loan with a car dealer.

Upfront deposit required

Have you considered needing a deposit for your vehicle? Car dealers often request an upfront deposit or the trade-in of your previous vehicle. If your new vehicle purchase is unexpected, you may not have the available cash for a deposit, or be able to trade in a sale worthy vehicle.

As you can see, it’s important to do your research when you’re in the market for a new vehicle, especially a second-hand vehicle. Knowing how much you can afford, and how you’ll repay your car loan and running costs such as car insurance and warrants of fitness, is an important part of your upfront research.

Considering a personal loan as a finance option can be a good idea if you want flexibility with how you spend your loan, flexibility in repayments, competitive interest rates, and a quick purchase. A personal loan can also be useful if you don’t have an upfront deposit or want to pay cash for a private sale.

Getting started with Nectar

Although there is plenty to consider when choosing a car, the finance side of things doesn’t need to be difficult. If you’re keen to kick off your new vehicle search,  find out how much you could borrow today with Nectar’s competitive interest rates, and flexible repayment options.

Before you commit to a test drive, get started with Nectar and instantly receive your pre-qualified interest rate, maximum borrowing amount and repayment options.* Borrow better, faster today!

*Nectar’s lending criteria and responsible lending checks apply.