Car Loans vs Personal Loans: Which Costs Less for Vehicle Finance
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CashPal TeamLast updated 29 August 2025
Car loans vs personal loans
A crucial comparison for Australians financing a car purchase is between car loans and personal loans. Costs, terms and long-term financial effects vary with each option. Recent data puts the average new-car loan rate around 7%, while personal loan rates typically start at 12% or more — but the most cost-effective option depends on your credit score, loan terms and financial objectives.
The fundamentals
Understanding the fundamental differences
An auto loan is secured against the car — if you can't repay, the lender can repossess it. Because of that protection, lenders usually offer cheaper rates. Personal loans don't require collateral, so lenders rely only on your income and creditworthiness — and raise prices to offset the added risk. That collateral difference is why there's a large cost gap between the two, though not everyone finds a car loan the best option.
Interest rate comparison
Major banks and credit unions offer new-car loans from 6.99% to 12% depending on credit history, with used-car loans typically adding 1%. Personal loans from the same institutions range 11.99%–24%, with most borrowers seeing 12–18%. On a $30,000 car financed over five years: a 7% car loan costs about $7,425 in total interest, while a 14% personal loan costs $12,420 — a $4,995 difference. Even a small percentage-point change can matter significantly over a normal loan term.
When each option offers better value
When car loans win on cost
Good to outstanding credit (scores over 650) typically unlocks the best rates — as low as 6.99% for new cars. New-car rates are often lower than used, since modern cars are more reliable and retain value better, and some manufacturers offer exclusive financing through captive finance arms. A deposit strengthens your position further — even 10% can lower your rate and total borrowing. Benefits: lower rates from safer cars, longer available terms, manufacturer financing incentives, and streamlined dealership lending procedures.
When personal loans provide better value
Personal loans can offer better terms for cars older than seven years, which many lenders either won’t finance or charge much higher rates for. You get instant, clear ownership, so you can sell whenever you like without a complicated loan transfer. Insurance is more flexible too — car loans usually require comprehensive cover, which can be costly for older cars, while a personal loan lets you choose your own insurance level. Some borrowers also prefer avoiding any repossession risk, even at a higher rate, and personal loans can cover associated costs like repairs or modifications.
Credit score impact on your options
| Credit score range | Car loan rates | Personal loan rates | Suggested choice |
|---|---|---|---|
| 750+ (Excellent) | 6.99%–8.5% | 11.99%–14% | Car loan |
| 650–749 (Good) | 8.5%–11% | 14%–18% | Car loan |
| 550–649 (Fair) | 11%–15% | 18%–22% | Car loan (if approved) |
| Below 550 (Poor) | Often declined | 22%–24% | Personal loan (limited options) |
A strategic approach to deciding
Car loans are best suited for borrowers with great credit, who often get rates 4–6 percentage points cheaper than personal loans. As the gap narrows for fair or low credit, personal loans become more competitive — and some personal loan lenders specialise in bad credit borrowers who’d be declined for an auto loan. First, determine the overall cost of each choice using your real circumstances, including fees, insurance requirements and deposit opportunity costs. Then weigh your risk tolerance: auto loans typically offer better value if you prioritise the lowest total cost and have good credit; personal loans suit those who want to minimise repossession risk and value flexibility.
A methodical decision process
- 1
Get quotes
Get quotations from several lenders for both loan types.
- 2
Total the cost
Determine overall expenses, including all fees and insurance requirements.
- 3
Check your credit
Examine your credit score and any areas where you could improve it.
- 4
Consider the car
Think about your preferred age and type of car.
- 5
Weigh flexibility vs risk
Assess your financial flexibility needs and risk tolerance.
Alternative financing and final recommendations
Conventional car loansand typical personal loans may not always be the best fit. Chattel mortgages provide tax benefits for business-use vehicles, and novated lease arrangements through employers via salary packaging can result in significant savings. If you’re facing financial difficulty, financial counsellors can help negotiate with lenders and explore hardship options before things get out of hand.
A car loan is usually better if you want the lowest rate, have good credit, are buying a newer car, and can make a deposit — the interest savings may outweigh harsher terms over the loan. A personal loan may offer more flexibility if you’re buying an older vehicle, prefer complete ownership from the start, or don’t fit car loan requirements. Advertised rates are never guaranteed regardless of the option — your final rate depends on loan duration, income and credit score, so always compare the total cost of repayment over the full term, not just the monthly instalment.
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