What are the differences between a car loan and a personal loan?
The two products overlap, so the question is less "which is better" and more "which one fits the car you are buying and the way each lender writes its policy." A car loan is secured against the vehicle itself. A personal loan is generally unsecured, which makes it the more flexible of the two — and often the only workable path for certain purchases.
Personal loans are commonly used to buy vehicles on a private sale, or older-model vehicles, precisely because the security rules on a car loan get in the way. Many car-loan lenders cap the age of the vehicle they will finance: a common policy is that the car must be no more than ten or twelve years old by the end of the loan term. If the car you want sits outside that band, a personal loan is usually the more suitable structure.
The same logic applies to imported vehicles. A car loan generally cannot be used to buy an imported car, mainly because the vehicle is not locally registered or compliant, which a secured lender reads as added risk on the asset it would be lending against. To finance a car brought in from Japan, for example, a personal loan is typically the option that fits.
Do you need substantial savings to qualify for a car loan?
Not necessarily. It is generally possible to finance up to 100% of the purchase price, and in some upgrade situations more than 100%. If you are trading in an existing car that still carries a loan, and the trade-in value will not clear that balance, some lenders will roll the shortfall into the new loan — so you would not necessarily need a deposit. A deposit can help secure a sharper rate, but it is not a precondition of approval.
What you do need to provide is proof of sufficient, stable income to show the repayments are affordable. That is the part lenders assess most closely, and it is where applications are won or lost. As with any lending, terms, rates and what counts as acceptable income vary from one lender to the next.
Loan terms, balloon payments and residuals
Depending on the lender, both car loans and personal loans commonly run over terms of five to seven years. Car loans can also offer features a plain personal loan does not — most notably a balloon (or residual) payment, which is worth understanding before you choose.
A balloon payment lets you defer part of the loan to the end of the term, which lowers your monthly repayments along the way. Residuals are generally set with reference to ATO guidelines. As an example: on a $30,000 car with a $10,000 residual, repayments are calculated on $20,000 rather than the full amount, which reduces the monthly figure. At the end of the term, the outstanding $10,000 falls due as a lump sum. At that point you have options — pay it out, refinance it, or trade the vehicle in and apply the trade-in value against the residual.
The trade-off is the point worth being deliberate about. A balloon reduces what you pay each month, but you are not paying the debt down as quickly, and you carry a lump sum at the end. Whether that suits you depends on what you intend to do with the car when the term finishes, and on how the structure fits the rest of your borrowing.
If you are weighing a car loan against a personal loan, it is worth matching the product to the specific vehicle and to how each lender's policy reads your circumstances, rather than defaulting to whichever is offered first. Book a strategy session and we will work through the structure that fits.
General information only — not personal financial product or credit advice. Lending is subject to each lender's policy, your full circumstances and responsible-lending assessment. AeFin is an Australian Credit Representative (CR 464548) of Finsure (ACL 384704).